Bans on short selling in times of high uncertainty can lead to adverse "herding" behavior among investors, according to a new report from The Centre for International Governance Innovation (CIGI).
The paper, "Short-Selling Bans and Institutional Investors' Herding Behaviour: Evidence from the Global Financial Crisis," examines bans on selected financial stocks in six countries during the 2008-09 global financial crisis in order to analyze the impact of short-sale restrictions and the impact on investors' trading and so-called herding behavior.
The paper concluded that short-selling restrictions have either no impact on herding behavior or induce adverse herding. "This implies a higher dispersion of returns around the market compared to rational asset pricing, which can be interpreted as an increase in uncertainty among stock market investors," CIGI says in a statement regarding the paper.
Restricting short sellers also causes uncertainty about stock prices, CIGI says in the paper, which can negatively impact investors' trust of market behavior. That also can cause adverse herd behavior, the group says. Additionally, short-sale bans may affect the pricing processes of institutional investors, according to the paper.
The CIGI paper, authored by Martin T. Bohl, Arne C. Klein and Pierre L. Siklos, is available for download here.