Short-selling bans and institutional investors' herding behaviour: Evidence from the global financial crisis ¬リニ

a r t i c l e i n f o The literature on short-selling restrictions focusses mainly on a ban's impact on market efficiency, liquidity and overpricing. Surprisingly, little is known about the effects of short-sale constraints on herd behaviour. Since institutional investors have come to dominate mature stock markets and rely extensively on short sales, constraining these traders may influence the asset pricing process. We investigate six stock markets that faced bans during the recent global financial crisis. Our empirical evidence shows that short-selling restrictions exhibit either no influence on herding formation 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. The effects of short-sale restrictions on market efficiency, liquidity and overpricing have been extensively studied in the finance literature. The global financial crisis has renewed interest about the consequences of short-selling bans. Regulators impose short-sale constraints to displace short sellers and, ostensibly, to prevent further declines in stock prices. Most notably, however, the literature is silent about short-sale constraints' effect on institutional investors' trading behaviour and, in particular, the possibility of generating herding behaviour. The present study aims to make a start in closing this gap. As outlined in Vives (2008, pp. 200–209) herding captures the conformity of investors' choices. In the present context this means that institutional investors will imitate each other when making investment decisions. Excluding short sellers constitutes market intervention, since, in spot markets, only investors owning stocks are able to express pessimistic beliefs about their underlying value. Short-sale bans may also affect the pricing process via institutional investors' trading because these investors dominate mature stock markets. 1 In addition, mainly institutional investors engage in short-selling as an instrument to express their negative opinion on future stock values. The consequences of herding behaviour may show up in the pricing process through the distribution of individual, or a cross-section of, stock returns relative to the performance of the market as a whole. This paper investigates the impact of short-selling restrictions on institutional investors' herding behaviour in the South Korea and Australia during the turmoil that afflicted financial markets in 2008–2009. The widely adopted approach proposed by Christie and Huang (1995) and Chang, Cheng, and Khorana (2000) is used to test the conjecture that short-sale constraints affect institutional investors' herd behaviour. By following …