Short-sale Constraints and Stock Price Crash Risk: Causal Evidence from a Natural Experiment

50 Pages Posted: 23 May 2016 Last revised: 16 Aug 2019

See all articles by Wesley Deng

Wesley Deng

University of Tasmania

Lei Gao

George Mason University

Jeong-Bon Kim

City University of Hong Kong

Date Written: June 1, 2019


We examine the relation between short-sale constraints and stock price crash risk. To establish causality, we take advantage of a regulatory change from the Securities and Exchange Commission (SEC)’s Regulation SHO pilot program, which temporarily lifted short-sale constraints for randomly designated stocks. Using Regulation SHO as a natural experiment setting in which to apply a difference-in-differences research design, we find that the lifting of short-sale constraints leads to a significant decrease in stock price crash risk. We further investigate the possible underlying mechanisms through which short-sale constraints affect stock price crash risk. We provide evidence suggesting that lifting of short-sale constraints reduces crash risk by constraining managerial bad news hoarding and improving corporate investment efficiency. The results of our study shed new light on the cause of stock price crash risk as well as the roles that short sellers play in monitoring managerial disclosure strategies and real investment decisions.

Keywords: Regulation SHO; short selling; stock price crash risk; managerial bad news hoarding; corporate investment efficiency

JEL Classification: G18; G34; G38; M41

Suggested Citation

Deng, Xiaohu and Gao, Lei and Kim, Jeong-Bon, Short-sale Constraints and Stock Price Crash Risk: Causal Evidence from a Natural Experiment (June 1, 2019). Journal of Corporate Finance, Forthcoming, Available at SSRN: or

Xiaohu Deng

University of Tasmania ( email )

Tasmanian School of Business and Economics
Private bag 84
Hobart, TAS 7001

Lei Gao (Contact Author)

George Mason University ( email )

Fairfax, VA 22030
United States


Jeong-Bon Kim

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

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