Are Short Selling Restrictions Effective?

Despite strong theoretical predictions based on disagreement, limited empirical evidence has linked short selling restrictions to higher prices. We test this relationship using quasi-experimental methods based on Rule 201, a threshold-based policy that restricts aggressive short selling when intraday returns cross -10%. When comparing stocks on either side of the threshold in the same hour of trading, we find that the restriction leads to 8% lower short sale volume and 35 bps higher daily returns. These price effects do not reverse and are not associated with information events, suggesting that Rule 201 restricts short selling based on transient opportunities unrelated to fundamentals. Although these persistent direct effects align with policymaker objectives, we find evidence of offsetting transient spillover effects on peer stocks consistent with cross-stock substitution by short sellers.