Restricted private information provision during short sale bans

Abstract

Purpose

The purpose of this paper is to examine the 2008 SEC short selling ban on financial firms and whether this ban negatively impacted private information provision in these short‐restricted equities.

Design/methodology/approach

This paper employs the French and Roll Variance Ratio (VR) as a proxy for private information provision in both an unconditional and conditional analysis. The unconditional analysis examines the VR across trading characteristics, firm characteristics, and time regimes. The conditional analysis models the VR in an event study framework where exogenous determinants of private information provision are held constant.

Findings

Empirical results indicate that private information provision increased due to the 2007 US financial crisis while information provision decreased due to the 2008 short selling ban. This study concludes that the 2007 financial crisis enticed informed short sellers into the market which then increased information provision. Further, the 2008 short selling ban restricted these informed short sellers from the market thus leading to a decrease in information provision in the short‐restricted firms. Interestingly, the information restricting effects of the 2008 ban were not severe enough to erode the gains in information provision originally induced by the financial crisis.

Originality/value

This paper specifically contributes by demonstrating that the 2008 SEC short selling ban negatively impacted private information provision. This paper contributes generally by showing that short sale bans' information effects are not completely restrictive. Rather, short sale bans' information effects are a function of firm characteristics and contemporaneous market conditions.

Citation

Tse, Y. and Williams, M. (2010), "Restricted private information provision during short sale bans", Managerial Finance, Vol. 36 No. 8, pp. 722-737. https://doi.org/10.1108/03074351011056545