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The Real Effects of Short-Selling Constraints

Author

Listed:
  • Gustavo Grullon
  • Sébastien Michenaud
  • James P. Weston

Abstract

We use a regulatory experiment (Regulation SHO) that relaxes short-selling constraints on a random sample of U.S. stocks to test whether capital market frictions have an effect on stock prices and corporate decisions. We find that an increase in short-selling activity causes prices to fall, and that small firms react to these lower prices by reducing equity issues and investment. These results not only provide evidence that short-selling constraints affect asset prices, but also confirm that short-selling activity has a causal impact on financing and investment decisions.

Suggested Citation

  • Gustavo Grullon & Sébastien Michenaud & James P. Weston, 2015. "The Real Effects of Short-Selling Constraints," The Review of Financial Studies, Society for Financial Studies, vol. 28(6), pages 1737-1767.
    • Handle: RePEc:oup:rfinst:v:28:y:2015:i:6:p:1737-1767.
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    File URL: http://hdl.handle.net/10.1093/rfs/hhv013
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