Short-Sale Constraints, Information Acquisition, and Asset Prices

49 Pages Posted: 28 Apr 2013 Last revised: 15 Sep 2017

See all articles by Pedram Nezafat

Pedram Nezafat

University of Michigan at Ann Arbor - Finance

Mark D. Schroder

Michigan State University - The Eli Broad Graduate School of Management

Qinghai Wang

University of Central Florida - College of Business Administration

Date Written: September 11, 2017

Abstract

During financial crises, financial market regulators often restrict short-selling to support prices and curb volatility. However, evidence suggests that short-selling bans during the turmoil in financial markets in 2007--2009 failed to achieve regulators' goals. We analyze a model of costly private information acquisition and asset pricing under short-sale constraints to examine a possible cause of this failure. We show that the constraints increase return volatility by adversely affecting the production of private information. When investors are highly risk averse or are holding highly correlated risky assets, the distortion in private information production arising from imposing short-sale constraints leads to undervaluation, implying that imposing short-selling bans during economic crises not only fails to curb volatility but also may fail to support prices.

Keywords: Return volatility, Short-selling bans, Financial crises, Information production, Asset prices

JEL Classification: G11, G14

Suggested Citation

Nezafat, Pedram and Schroder, Mark D. and Wang, Qinghai, Short-Sale Constraints, Information Acquisition, and Asset Prices (September 11, 2017). Available at SSRN: https://ssrn.com/abstract=2257093 or http://dx.doi.org/10.2139/ssrn.2257093

Pedram Nezafat (Contact Author)

University of Michigan at Ann Arbor - Finance ( email )

701 Tappan Street
Ann Arbor, MI 48109-1234
United States

Mark D. Schroder

Michigan State University - The Eli Broad Graduate School of Management ( email )

323 Eppley Center
East Lansing, MI 48824-1121
United States
517-432-0622 (Phone)
517-432-1080 (Fax)

Qinghai Wang

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

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