The Efficacy of Discretionary Short Sale Rules: The Case of Hong Kong

36 Pages Posted: 9 Jul 2015 Last revised: 30 Nov 2018

See all articles by Darwin Choi

Darwin Choi

The Chinese University of Hong Kong (CUHK) - CUHK Business School

Zsuzsa R. Huszar

SP Jain School of Global Management

Date Written: November 29, 2018

Abstract

We examine the efficacy of short sale regulations in Hong Kong, where the list of shortable stocks is managed by regulators and is updated quarterly. While regulators generally cautiously restrict short selling to larger stocks, we show evidence of deviations: some large liquid stocks, which appear to satisfy the regulators’ stated selection criteria, are excluded from the list. In the absence of short sellers, these stocks earn positive excess returns after the list is made publicly available; such price impacts possibly represent an unintended consequence of the short sale regulations. We also find that the likelihood of large liquid stocks being excluded from the list increases in the ownership by Chinese institutions. Overall, our findings suggest that regulatory interventions should be made more transparent to maintain price efficiency.

Keywords: Government policy and regulation, Market efficiency, Market transparency, Regulators' role, Short selling, Short sale regulations

JEL Classification: G12, G18

Suggested Citation

Choi, Darwin and Huszar, Zsuzsa R., The Efficacy of Discretionary Short Sale Rules: The Case of Hong Kong (November 29, 2018). Available at SSRN: https://ssrn.com/abstract=2627908 or http://dx.doi.org/10.2139/ssrn.2627908

Darwin Choi (Contact Author)

The Chinese University of Hong Kong (CUHK) - CUHK Business School ( email )

Cheng Yu Tung Building
12 Chak Cheung Street
Shatin, N.T.
Hong Kong

Zsuzsa R. Huszar

SP Jain School of Global Management ( email )

10 Hyderabad Road
Singapore, 119579

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