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

61 Pages Posted: 22 Jan 2021

See all articles by Lixin (Nancy) Su

Lixin (Nancy) Su

Department of Accountancy, Lingnan University

Sonia Man-Lai Wong

Sun Yat-Sen University (SYSU) - Department of Finance and Insurance

Yuan Xue

Huazhong University of Science and Technology

Xiaofeng Zhao

Lingnan University - Department of Finance and Insurance

Date Written: January 15, 2021

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

Suggested Citation

Su, Lixin (Nancy) and Wong, Sonia Man-Lai and Xue, Yuan and Zhao, Xiaofeng, Do Short-Sale Constraints Inhibit Information Acquisition? Evidence from Two Natural Experiments (January 15, 2021). Available at SSRN: https://ssrn.com/abstract=3766616 or http://dx.doi.org/10.2139/ssrn.3766616

Lixin (Nancy) Su

Department of Accountancy, Lingnan University ( email )

8 Castle Peak Road
Lingnan University
Hong Kong, New Territories
China

Sonia Man-Lai Wong

Sun Yat-Sen University (SYSU) - Department of Finance and Insurance ( email )

Tuen Mun
Hong Kong

Yuan Xue

Huazhong University of Science and Technology ( email )

1037# Luoyu Road, Hongshan Dist.
Wuhan, Hubei 430074
China

Xiaofeng Zhao (Contact Author)

Lingnan University - Department of Finance and Insurance ( email )

8 Castle Peak Rd
Tuen Mun
Hong Kong

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