Faculty and Research

Working Paper, 2008

Publication type: Working paper

Research Archive Topic: Business Economics and Public Policy, Capital Markets and Investments, Corporate Finance

Abstract

This paper examines several discrete events in the U.S. in the 1930s that made shorting more difficult or impossible, and it draws parallels with short sale regulatory changes in 2008. In September 1931, the New York Stock Exchange banned shorting for two days after England abandoned the gold standard. Shorting on a downtick was prohibited the next month. In early 1932, brokers were required to secure written authorization before lending a customer's shares for shorting. Three weeks later, the U.S. Senate released a list of entities with the biggest short positions. Finally, in 1938, the tick test was tightened to require all short sales to take place on a strict uptick.

Short interest and securities lending data indicate that each event made shorting more difficult. Average returns associated with the events are significantly positive, consistent with the limits-to-arbitrage notion that when there are restrictions on shorting, optimists have more influence on prices. This paper also examines the evolution of liquidity around these shorting restrictions.

Each author name for a Columbia Business School faculty member is linked to a faculty research page, which lists additional publications by that faculty member.

Each topic is linked to an index of publications on that topic.