The Loud Silence of Suppressed Short-Sale Demand

55 Pages Posted: 25 Jan 2018 Last revised: 31 Jan 2018

See all articles by Jinjuan Ren

Jinjuan Ren

University of Macau

Yinghui Yu

Singapore University of Social Sciences

Date Written: January 31, 2018

Abstract

Utilizing the special institutional setting in the Chinese securities market, we examine how suppressed short-sale demand influences stock valuations and price efficiency for stocks with no short-selling activities. Based on revealed short-sale volume of shortable stocks, we employ a characteristics model to estimate the suppressed short-sale demand for non-shortable stocks, with a higher short-sale demand being suppressed indicates a more binding short-sale constraint. We find that suppressed short-sale demand negatively predicts future returns, and such relation concentrates among firms with poor information environment. Consistent with Diamond and Verrecchia (1987)’s reduced-pricing-efficiency theory, we find that a higher suppressed short-sale demand is associated with a greater price delay and a stronger post-earnings-announcement-drift.

Keywords: Short-Sale Demand, Overvaluation, Price Efficiency, Chinese Market

JEL Classification: G12, G14, G18

Suggested Citation

Ren, Jinjuan and Yu, Yinghui, The Loud Silence of Suppressed Short-Sale Demand (January 31, 2018). Available at SSRN: https://ssrn.com/abstract=3109185 or http://dx.doi.org/10.2139/ssrn.3109185

Jinjuan Ren (Contact Author)

University of Macau ( email )

Room 4079, E22, Faculty of Business Administration
University of Macau
Taipa, Taipa Nil
Macau
(853) 8822-4185 (Phone)

HOME PAGE: http://www.umac.mo/fba/staff/susanren.html

Yinghui Yu

Singapore University of Social Sciences ( email )

463 Clementi Road
599494
Singapore

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