Short-Sale Constraints and Real Investments
53 Pages Posted: 12 Aug 2016 Last revised: 27 May 2020
Date Written: May 31, 2019
This paper studies how short-sale constraints affect the informational efficiency of market prices and the link between prices and real economic activity. I show that under short-sale constraints security prices contain less information. However, short-sale constraints increase the informativeness of prices to some agents who learn about the quality of an investment opportunity from market prices and have additional private information. In a setting with investment complementarities, this leads to the revival of self-fulfilling beliefs about the beliefs and actions of others, and creates multiple equilibria in investments with higher allocative efficiency. My results thus imply that the decrease in average price informativeness due to short-sale constraints can be more than compensated by an increase in informativeness to some agents.
Keywords: asymmetric information, short-sale constraints, coordination, complementarities, efficiency
JEL Classification: C7, D82, D84, G14, G18, G31
Suggested Citation: Suggested Citation