"Shorting Restrictions: Revisiting the 1930s"
Publication type: Working paper
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.
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