Do Short-Sale Constraints Inhibit Information Acquisition? Evidence from the US and Chinese Markets
68 Pages Posted: 22 Jan 2021 Last revised: 13 Jan 2023
Date Written: January 15, 2021
This study examines how short-sale constraints affect investors’ information acquisition and thereby shape stock price efficiency. By exploiting two settings 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. Investors acquire value-relevant information, especially bad news, and improve their short-selling decisions in both markets. Lastly, information acquisition induced by the removal of short-sale constraints improves price efficiency. Our evidence shows that a reduction in trading frictions promotes information acquisition and improves price efficiency.
Keywords: Short-sale constraints, information acquisition, price efficiency, Regulation SHO
JEL Classification: G14, D83
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