Remember how regulators in many countries panicked during the free fall in the markets last year and responded by knee-jerk bans on short sales? The blame for plunging markets was pinned on evil short-sellers, as if people had a moral duty to support stock prices. Most experts had at that time condemned these hasty decisions, pointing out that short-sellers are providers of liquidity to the markets.
Those protests had little impact and the bans were removed in due course as the markets stabilized.
It’s now more than a year since those bans were imposed and we have a wealth of data to sift through to see whether the restrictions on short-selling worked. Alessandro Beber of the University of Amsterdam and Marco Pagano of the University of Naples Federico II have now carried out a study of the bans and regulatory constraints on short-selling during the recent financial crisis, by examining data for around 17,000 stocks from 30 countries. They compared the prices of stocks for which short-sales were restricted (financial stocks in some countries) with stocks that didn’t have these restrictions. They also estimated the impact of the ban by comparing stocks where short-selling was banned with similar stocks in countries where there was no ban.
Their results showed that banning short sales or imposing constraints on them led to a rise in bid-ask spreads, which means market liquidity had declined. The negative impact on market liquidity was the highest in countries with a large proportion of small-cap and volatile stocks as well as in markets where stock ownership is more concentrated. The researchers also found that “By restraining the trading activity of informed traders with negative information about fundamentals, a short-selling ban slows down price discovery, and more so in bear market phases than in bullish ones.” And finally, they found that restricting short-sales failed to meet the regulators’ primary objective of stemming the fall in share prices.
Illustration: Jayachandran / Mint
Several months after the ban on short-sales had been imposed, in a telephone interview to Reuters, Christopher Cox, the former chairman of the US Securities and Exchange Commission who had banned short-selling of stocks for a few weeks, had the grace to say, “Knowing what we know now, I believe on balance the commission would not do it again. The costs (of the short-selling ban on financials) appear to outweigh the benefits.”
How large are returns to schooling? Hint: Money isn’t everything, by Philip Oreopoulos and Kjell G. Salvanes, NBER
We all know that more schooling results in better jobs and higher incomes—at least if we compare college graduates with high school graduates and those who have done their MBA from those that haven’t. But Philip Ourepoulos and Kjell Salvanes of the US National Bureau of Economic Research are interested in measuring the non-pecuniary benefits of more schooling.
For instance, they find the US surveys have shown that workers with a college education report higher levels of job satisfaction than those with a high school education who, in turn, do better than those who have dropped out of high school. The interesting thing is that this holds true even when the differences in income are not much. The researchers say, “after reporting having roughly the same annual household income, high school graduates still report being happy around 4 percentage points more often than high school dropouts, and college graduates report being happy slightly more than 2 percentage points more often than high school graduates.”
Illustration: Jayachandran / Mint
Other benefits include a lower probability of finding oneself unemployed, much better chances in the marriage market, improvement in decision-making capabilities that lead to better choices, including more stable marriages and better parenting. The authors provide a long list of benefits: “Schooling also encourages patience and long-term thinking. Teen fertility, criminal activity, and other risky behaviour decrease with it. Schooling promotes trust and civic participation. It teaches students how to enjoy a good book and manage money.”
Perhaps all this is true in the US. But in India, where a PhD or a postgraduate study course is often taken up by people unable to get a better job, the link between good jobs and schooling may be tenuous. Why else do thousands of people with post-graduate degrees apply for menial jobs in Indian Railways? And does our education system, with its emphasis on rote learning, really promote trust and improve our decision-making skills?