Do Short-Sale Constraints Inhibit Information Acquisition? Evidence from Two Natural Experiments

Abstract

This study examines how short-sale constraints affect investors’ information acquisition and thereby shape stock price efficiency. We exploit two quasi-natural experiments that relax short-sale constraints in the US and China, respectively. We find that the removal of short-sale constraints increases investors’ information acquisition in both markets, but the effect is more prompt in China, where short selling was permitted for the first time. Investors acquire value-relevant information, primarily good news in the US and bad news in China, and improve trading profits. Lastly, information acquisition induced by the removal of short-sale constraints improves price efficiency in both markets. Our study provides direct empirical evidence that short-sale constraints affect stock prices by influencing the production of information.

Keywords: Short-sale constraints, information acquisition, price efficiency, Regulation SHO

JEL Classification: G14, D83