Regulatory Trading Restrictions, Overvaluation,
and Insider Selling

Abstract

In 2008, trading restrictions prohibited short selling in nearly 800 U.S. financial stocks with a market value of $1.5 trillion. These measures were quickly adopted abroad and were still being implemented as recently as August 2011. Despite the massive scope, global reach, and continued use of restrictions, outcomes are not well documented or fully understood.This article examines the trading ban and documents four important findings: (1) Trading restrictions stabilized falling prices for most (75%), but not all securities. (2) Price stabilization due solely to TARP is ruled out. (3) Cross-sectional return differences provide further evidence on the relationship between institutional ownership and short sale constraints. Firms with low institutional ownership, low short interest, small market cap, and those traded on the Nasdaq were least affected by the ban. (4) Sharp declines (-40%) in short interest contributed to less informative prices. Overall, results indicate trading restrictions stabilized price but were less effective for securities previously constrained by other factors.Further, benefits from price stabilizing activities were offset by less informative prices.