An interesting article. I am very jaundiced towards the European Politicians and assorted people who drive their economic future. its a mess, to put it bluntly.
I quote the abstract:
Exploiting cross-sectional and time-series variations in European regulations during the July 2008–June 2009 period, we show that: 1) Prohibition on covered short selling raises bid-ask spread and reduces trading volume, 2) Prohibition on naked short selling raises both volatility and bid-ask spread, 3) Disclosure requirements raise volatility and reduce trading volume, and 4) No regulation is effective against price decline. Overall, all short-sale regulations harm market efficiency. However, naked short-selling prohibition is the only regulation that leaves volumes unchanged while addressing the failure to deliver. Therefore, we argue that this is the least damaging to market efficiency.
This is the idiocy behind the governments and economics people who try to ban short selling. The evidence that banning short selling introduces inefficiencies into the market is clear and incontrovertible. Where they aren't banned, the markets work better, absorb information faster and generally are good eggs. This exacerbates the insider outsider issue. If the idea behind the European Regulators and Politicians was to improve their markets, then this failed miserably. Spreads become wider. Trade volumes reduce. not good.