The Double-Edged Sword of The 2020 European Short-Selling Bans

In this paper, we present a theoretical framework to study the effects of short-selling bans on markets and we test its predictions using cross-sectional variation in the European 2020 short-selling bans. The model's novelty is in the way that institutional ownership affects the conditions under which bans help avert a sharp decline in prices. Empirically we find, consistent with the model, that tail risk was reduced in countries that implemented short-selling bans, and that this effect was more pronounced in stocks with low institutional ownership. However, bans were detrimental for liquidity and failed to support the average level of prices.