Short-Selling Bans: Impact on Liquidity, Price Discovery and Stock Prices

The debate around the practice of short-selling, to restrict or not, is continual among academicians, regulators and practitioners. Short-selling bans are practiced by the regulators with a belief that it has the power to improve the market quality. With an objective to establish an academic standing to this date, this paper examines the last body of literatures addressing this issue, limited to three market quality parametersliquidity, speed of price discovery and stock pricing, and summarizes the ideas and evidences. In most of the cases, the theoretical and empirical studies provide some clear indication: short-selling bans are liquidity damaging, detrimental to the speed of price discovery and has no or under-pricing effect, but in few cases the evidence is not straight forward. Evidences are more generally different than what are popularly argued by the regulators in imposing short-selling restrictions.