Short-Selling and Floating Constraints and Cross-Listed Stock Prices

Abstract

We investigate the joint effects of short-selling, floating constraints and heterogeneous beliefs on stock prices by using a unique data set of cross-listed Chinese stocks. Because domestic A-shares are subject to both short-selling and floating restrictions while foreign H-shares are not, H-share price discount represents a trading restriction induced price bubble. The H-share price discounts are significantly and positively correlated with short-sale transactions of H-shares, and negatively correlated with the non-tradable A-share reform variable, after controlling for market-specific sentiment and other factors. We also find that short-selling significantly widens the price discounts in bullish but not in bearish market period; and in market return up days but not in down days.

Keywords: short-sale constraints, floating restriction, heterogeneous beliefs, sentiment, cross listing

JEL Classification: G10, G12, G15