Manipulation, Panic Runs, and the Short Selling Ban

This paper identifies conditions under which a short selling ban improves the ex-ante firm value. Short selling improves price discovery and enables stakeholders to make better investment decisions. However, manipulative short selling can arise as a self-fulfilling equilibrium, resulting in inefficient investment decisions. The adverse effect is amplified by the firm's vulnerability to panic runs. Overall, short selling reduces ex-ante firm value if the firm is very vulnerable to runs and the speculator's information quality is not too good. Our results contribute to understanding of the function of short selling in the capital markets and to the controversy around the regulation of short selling.