Original title: The Double-Edged Sword of Short-Selling Bans
Pasquale Della Corte, Robert Kosowski, Dimitris Papadimitriou, Nikolaos P. Rapanos · September 2026
When stock markets crash, regulators sometimes ban short-sellingBorrowing and selling a stock you don't own, hoping to buy it back cheaper later., which is a way investors bet that stock prices will drop. Officials hope this stops market panics, but it can backfire. Researchers built a model to study why regulators make this choice. Then, they tested it using real bans across European countries in 2020. The bans work by blocking negative bets to prevent sudden, massive crashes. However, shutting down these trades creates side effects. The authors found that the bans succeeded in stopping extreme price drops. At the same time, they harmed market liquidityHow easily you can buy or sell a stock without moving its price much., making stocks harder to buy and sell. The rules also failed to boost average stock prices. How well bans work ultimately depends on the share of informed stockholdersInvestors who have private information about a company's true value..
Imagine a referee in a basketball game deciding to ban three-point shots to prevent one team from pulling too far ahead. The ban stops the big scoring runs, but it also makes the game less fluid and lowers the total points scored. Here, the regulator is the referee, short-selling bans are the three-point shot ban, and the market's liquidity and average price are the game's flow and total score. The ban's success depends on how many players are skilled at three-pointers—just as the ban's effectiveness depends on how many informed stockholders are in the stock.
Regulators considering short-selling bans face a trade-off: the bans can prevent extreme price drops, but they also reduce liquidity and fail to support average prices. The effectiveness depends on how many informed traders are in the market, which means a one-size-fits-all ban is likely to backfire. This helps design smarter, more targeted regulations.
The abstract doesn't explicitly state limitations, but the empirical analysis uses cross-sectional variation from European countries in 2020, so the findings may not generalize to other regions or time periods. The model's central variable—the share of informed stockholders—is not defined or measured in the abstract, leaving practical application unclear.
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The Double-Edged Sword of Short-Selling Bans — Pasquale Della Corte, Robert Kosowski, Dimitris Papadimitriou et al.
Abstract licence: CC0
Explanation generated by Synthesis from the abstract — it is not the original paper. This is a preprint, so it hasn't necessarily been peer reviewed.