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Manipulation, panic runs, and the short selling ban

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  • Gao, Pingyang
  • Jiang, Xu
  • Lu, Jinzhi

Abstract

Short selling regulation has been a longstanding topic of debate in financial markets, particularly during times of crisis. While proponents argue that short selling aids in price discovery and market efficiency, critics raise concerns about manipulative short selling practices that can destabilize markets. This paper presents a theoretical model to analyze the impact of short selling, specifically manipulative short selling (MSS), on bank runs and efficiency. The model demonstrates that MSS can emerge as an equilibrium outcome driven by uninformed speculators seeking to profit from artificially depressing stock prices. The prevalence of MSS is influenced by the level of informed trading and coordination friction among creditors. We find that short selling bans can enhance welfare by mitigating the negative effects of MSS, particularly in scenarios with high coordination frictions. We also provide policy and empirical implications.

Suggested Citation

  • Gao, Pingyang & Jiang, Xu & Lu, Jinzhi, 2025. "Manipulation, panic runs, and the short selling ban," Journal of Economic Theory, Elsevier, vol. 223(C).
    • Handle: RePEc:eee:jetheo:v:223:y:2025:i:c:s0022053124001455
    DOI: 10.1016/j.jet.2024.105939
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    More about this item

    Keywords

    Short selling regulation; Feedback effect; Strategic complementarity; Bank runs;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • M21 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Economics - - - Business Economics

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