According to a new report by IMD business school professor
Arturo Bris, market quality deteriorated for the 19 stocks that were covered by the Securities and Exchange Commission's (SEC) emergency order to prevent naked shorts during the 23-day term.
"Our preliminary findings show that the impetus for the SEC's emergency order – that short selling was adversely affecting the performance of the 19 financial stocks – is groundless," said Arturo Bris, who is also an associate with the Yale International Center for Finance. "Worse, the order has resulted in a decline in market quality for the emergency order covered securities compared to comparable financial stocks. As a consequence, the emergency order restraints on short selling contributed to a decline in share prices for the 19 stocks."
Although the performance of the 19 stocks (G19) has been significantly worse than that for comparable firms, "the negative returns of G19 stocks cannot be attributed to short selling activities," the study found. Non-G19 stocks have been shorted more heavily both in 2007 and 2008 than G19 stocks. Further, the study's analysis showed an insignificant effect of measures of shorting activity on weekly stock returns, once we control for firm and market characteristics.
"After controlling for short sales, the performance of G19 stocks is still worse than for comparable firms," the study says. "The efficiency of G19 stocks has [also] deteriorated more than the efficiency of comparable US financial stocks."
The 19 stocks lost 3.83% in value compared to their peers between 21 July and 4 August. With $1,540 billion in total market capitalization for the G19 stocks, a negative 3.83% loss relative to peers is equivalent to about $60 billion loss for the G19 shareholders.
Bris conducted the study by comparing stock returns, firm fundamentals, measures of market quality and pricing efficiency of the 19 stocks to a matching sample of financial stocks from the US and abroad, all listed in US stock exchanges. The control sample of US financial institutions included 59 companies and the control sample of non-US financial institutions included 73 companies. Data was collected for the period 1 July 2006 through 8 August 2008.
The SEC emergency order went into effect on 21 July and was extended through to 13 August.