The price effect of temporary short-selling bans: Theory and evidence

We develop a model of temporary short -selling bans by extending the infinite -horizon model of Scheinkman and Xiong (2003). Our model predicts that a temporary short -selling ban leads to a speculative bubble that is the highest at the beginning of the ban and gradually converges to zero. Examining the 2008 short -selling ban in the U.S., we find evidence consistent with the model's predictions. The innovation of our empirical design is to use the financial segments of non -banned stocks as a control group for the banned financial stocks. Our results are robust across different test specifications and different samples of stocks.