Abstract
We characterize the legality and the incidence of short selling in a worldwide, multimarket framework. Home country short selling restrictions not only curtail home market stock borrowing by 48%, but also reduce short selling of the country’s ADRs by 68% due to regulatory reach. When the U.S. banned short selling in the financial stocks in 2008, regulatory reach also worked in the reverse direction as foreign stock borrowing in these stocks declined. The negative impact of home market restrictions survives in multivariate short selling regressions, which control for option markets, law enforcement, past returns, firm size, trading volume, dividends, ADR level, volatility, days-to-cover, and industry sector. Investor conduct resulting from adherence to professional standards is a more powerful mechanism of regulatory reach than judicial cooperation among countries with working groups such as G7, OECD or EU.
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