The US Securities and Exchange Commission was right to step in to regulate short-selling during the 2008 financial crisis – but such oversight should be rare and temporary, a study by Michigan State University has found.
The study, “Doing battle with short sellers: The conflicted role of blockholders in bear raids” and published in the Journal of Financial Economics, is one of the first to suggest when the SEC should get involved in the market.
Experts say predatory short selling contributed to the fall of Lehman Brothers and damaged other large firms while the credit market was frozen.
Professor Khanna said the SEC was right to move, despite being severely criticised for it. But he said overregulation of short selling could dissuade large shareholders from battling the short sellers, leaving it up to the government instead and creating the issue of moral hazard.
Otherwise, the healthy tug-of-war between large shareholders and short sellers meant the market was self-regulating.