Document Type


Publication Date

Spring 2008


This paper empirically examines the effect of the uptick rule (including the bid test applicable to NASDAQ stocks) of short sale regulations on stock prices and short selling activities immediately after negative earnings surprises that occurred during the period of May to November 2005. It compares price paths and short selling activities of stocks restricted by the uptick rule with stocks that were exempted from the rule as a result of the SEC's Pilot Program. The study has not found any evidence that prices of stocks subject to the rule declined at a slower speed than prices of exempted stocks at times of stress. Tho two groups of stocks had similar levels of short sale volumes despite the rule's prohibition on short selling at minus or zero-minus ticks. For NYSE and AMEX stocks, this study shows that market short orders whose immediate executions were barred by the uptick rule found execution opportunities against the upcoming buy orders within 15 minutes after their conversion into limit orders at the legally shortable price. For NASDAQ stocks, this study shows that up bids occurred with high frequency after negative earnings surprises and jointly with price improvements they offered generous execution opportunities to short sale orders. This study lends support to tho SEC's recent suspension of the rule in absence of severe market conditions.