Information Absorption in Stocks with Short-Selling Constraints

43 Pages Posted: 19 Mar 2021 Last revised: 27 Aug 2021

See all articles by Ioannis V. Floros

Ioannis V. Floros

University of Wisconsin - Milwaukee - Department of Finance

Ajai K. Singh

Department of Finance, University of Central Florida

Katsushi Suzuki

Hitotsubashi University - Graduate School of International Corporate Strategy

Date Written: August 26, 2021

Abstract

Under short-sales restrictions, we document a phenomenon where the market reacts again to publicly available adverse information, to which it has already responded before. We employ a Japanese dataset endowed with distinctive regulatory features pertaining to trading restrictions for a specific subset of stocks. Japanese SEOs also have unique regulatory aspects. Specifically, a Japanese SEO’s issue date, by regulation, is a minimum of five trading days from its pricing date. We posit that when an SEO is announced for short-sales restricted stocks, pessimistic investors are initially kept at abeyance and restricted from responding freely until the issue date, to the offering-related adverse information. The price reaction on the issue date, is to the now stale information to which the market has already reacted at its announcement. The phenomenon is attributable to a delayed reaction to publicly available information for short-sales restricted stocks, manifested only when additional shares are introduced.

Keywords: Short-sales Constraints, Stale Information, Increased Supply, Relative Offer Size

JEL Classification: G14, G15, G32

Suggested Citation

Floros, Ioannis V. and Singh, Ajai K. and Suzuki, Katsushi, Information Absorption in Stocks with Short-Selling Constraints (August 26, 2021). Available at SSRN: https://ssrn.com/abstract=3780820 or http://dx.doi.org/10.2139/ssrn.3780820

Ioannis V. Floros

University of Wisconsin - Milwaukee - Department of Finance ( email )

Milwaukee, WI 53201-0742
United States

Ajai K. Singh (Contact Author)

Department of Finance, University of Central Florida ( email )

College of Business Administration
12744 Pegasus Drive
Orlando, FL 32816
United States
407-823-0761 (Phone)
407-823-6676 (Fax)

Katsushi Suzuki

Hitotsubashi University - Graduate School of International Corporate Strategy ( email )

2-1-2 Hitotsubashi
Chiyoda-ku,
Tokyo, 101-8439
Japan

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