Banning Naked Short Sales: The Case of The U.S. 2008 Emergency Order
Niemelä, Tero (2015)
Niemelä, Tero
2015
Kuvaus
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This thesis studies how the U.S. 2008 Emergency Order (EO) impacted the affected stocks’ returns, liquidity and distribution of returns. The EO was a naked short sale ban that was imposed by the SEC and which covered 19 U.S. listed major financial firms’ stock between 21.7–12.8.2008. The thesis’ data sample includes the 19 stocks subject to the EO and 19 closely matched control stocks, whose covered and naked short selling was unrestricted while the EO was in effect. In terms of research methodology, an event study approach is employed for return impacts, and both univariate (i.e. paired t-tests and Wilcoxon matched pairs signed-rank tests) and multivariate (i.e. matched-pair fixed effects panel regressions) approaches are utilized for the liquidity and return distribution impacts. The sample period for the empirical analysis regarding the liquidity and return distribution impacts is divided into three distinct time periods, i.e. the pre-EO period (3.4–14.7.2008), the EO period (21.7–12.8.2008), and the post-EO period (13.8– 5.9.2008). The thesis extends the earlier research regarding the EO’s impacts by extending the sample size, by employing a multivariate approach that examines the banned and control stocks in a matched-pair setting, and by conducting comprehensive analysis on whether the EO had a stabilizing or destabilizing effect on stock prices.
The empirical analysis reveals that the EO had a positive impact on the banned stocks’ abnormal returns, however the positive impact dissipated in its entirety when the EO was lifted. Although the EO had a clear impact also on the control stocks’ abnormal returns, the banned stocks’ abnormal returns were noticeably more affected. Moreover, the findings indicate that the EO impaired the banned stocks’ liquidity particularly via an increase in transaction costs (measure by bid-ask spreads), but also via a decrease in trading activity (measured by turnover ratio) relative to the control stocks. The findings regarding the return distribution measures are somewhat ambiguous. That is, the banned stocks experienced a larger increase in volatility than their matched control stocks while the EO was in place, but the banned stocks experienced also a lower occurrence of extreme negative daily returns during the EO as compared with the non-EO periods. Overall, it can be concluded that by implementing the EO the SEC achieved its implicit goal of temporarily supporting the banned stocks’ prices and reducing the probability of large sudden price drops. However, these accomplishments were accompanied with worsened liquidity and increased volatility, indicating that market quality was heavily compromised. Hence, the partial and somewhat elusive success of the EO came with a high price, and it appears like the EO’s costs outweighed the benefits. In a sense, it seems like by implementing the EO the SEC managed to shift at least some of the blame for the volatile and uncertain U.S. market conditions to naked short sellers.
The empirical analysis reveals that the EO had a positive impact on the banned stocks’ abnormal returns, however the positive impact dissipated in its entirety when the EO was lifted. Although the EO had a clear impact also on the control stocks’ abnormal returns, the banned stocks’ abnormal returns were noticeably more affected. Moreover, the findings indicate that the EO impaired the banned stocks’ liquidity particularly via an increase in transaction costs (measure by bid-ask spreads), but also via a decrease in trading activity (measured by turnover ratio) relative to the control stocks. The findings regarding the return distribution measures are somewhat ambiguous. That is, the banned stocks experienced a larger increase in volatility than their matched control stocks while the EO was in place, but the banned stocks experienced also a lower occurrence of extreme negative daily returns during the EO as compared with the non-EO periods. Overall, it can be concluded that by implementing the EO the SEC achieved its implicit goal of temporarily supporting the banned stocks’ prices and reducing the probability of large sudden price drops. However, these accomplishments were accompanied with worsened liquidity and increased volatility, indicating that market quality was heavily compromised. Hence, the partial and somewhat elusive success of the EO came with a high price, and it appears like the EO’s costs outweighed the benefits. In a sense, it seems like by implementing the EO the SEC managed to shift at least some of the blame for the volatile and uncertain U.S. market conditions to naked short sellers.