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 in both markets, primarily good news in the US and bad news in China, which helps improve short sellers’ 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