The financial stocks subject to the Securities and Exchange Commission’s temporary ban on short selling suffered a severe degradation in market quality, price stability, and intraday volatility. That’s the conclusion of an academic study analyzing the impact of the ban.

“All the empirical evidence says shorting restrictions cause prices to be wrong, and the evidence here follows suit,” write Ekkehart Boehmer of Texas A&M University, Charles M. Jones of Columbia Business School, and Xiaoyan Zhang of Cornell University, the authors of the preliminary working paper, Shackling Short Sellers: The 2008 Shorting Ban. In that sense, they say, the SEC “probably achieved its unstated goal of artificially raising prices on financial stocks.”

The paper compares short-banned stocks to a control group of non-banned stocks, and looks at changes in stock prices, the rate of short sales, the aggressiveness of short sellers, and various liquidity measures before, during, and after the shorting ban, which extended from Sept. 19 through Oct. 8.

“Ultimately, the analysis shows that any effects there are on prices are temporary,” Jones tells Compliance Week. “It didn’t keep firms from failing ... It really can’t do much because short sellers aren’t really the problem.”

The analysis found that the start of the shorting ban was associated with a sharp increase in share prices for affected stocks, consistent with most models of shorting constraints, and that shorting activity dropped by about 85 percent.

“Stocks subject to the ban suffered a severe degradation in market quality, as measured by spreads, price impacts, and intraday volatility,” the study states.

Prior to the ban, the banned stocks and the control group had similar returns. The naked shorting ban, announced and implemented Sept. 18, a day before the ban on shorting financial stocks, affected the prices of both groups: Stocks where shorting was never banned rose an average of 4.83 percent, while 146 NYSE financial stocks that appeared on the next day’s shorting ban list rose by an average of 12.5 percent, according to the report.

On Sept. 19, the day the shorting ban took effect, the banned stocks rose by an additional 10.9 percent, compared to an average 4.46 percent return for the sample stocks where shorting was never banned. S&P 500 returns were similar to the return on the non-banned stocks. As the ban continued, both sets of stocks declined sharply in value, but the effects were similar for banned and non-banned stocks.

“We suspect that after some time has passed, future observers will look back at this shorting ban with the same kind of wonder that economists reserve for Nixonian price controls and other similar government interventions,” the authors write. “Those future observers will probably ask: Did they really think that would do any good?”

Jones expects to publish an expanded version of the paper in mid-January.