Short Selling Bans and Limits to Regulatory Arbitrage in a Multi-Market Setting

51 Pages Posted: 17 Feb 2021 Last revised: 10 Mar 2021

See all articles by Yu Hu

Yu Hu

Florida International University, Department of Finance

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics

Suchi Mishra

Florida International University (FIU) - Department of Finance

Robinson Reyes-Peña

Florida International University

Date Written: February 17, 2021

Abstract

We evaluate the role of foreign short-sale restrictions in muting the full return-response following negative earnings surprises for stocks cross-listed in unbanned markets. We update the global timeline of short-sale restrictions until the COVID-19 crisis period. Instead of regulatory price arbitrage, we surprisingly observe cross-border reach of bans manifested in a delayed price response, accompanied by a reduction in short interest and failures to deliver. Nonetheless, large profit opportunities result in price arbitrage and full return-response. Analysis of earnings management practices and CEO compensation structure reinforces the role of the profit opportunity in moderating the effects of short-sale restrictions.

Keywords: Market efficiency, post-earnings-announcement drift, short selling, ADRs, regulatory reach, regulatory arbitrage

JEL Classification: G15, G18

Suggested Citation

Hu, Yu and Jain, Pankaj K. and Mishra, Suchismita and Reyes-Peña, Robinson, Short Selling Bans and Limits to Regulatory Arbitrage in a Multi-Market Setting (February 17, 2021). Available at SSRN: https://ssrn.com/abstract=3787249 or http://dx.doi.org/10.2139/ssrn.3787249

Yu Hu

Florida International University, Department of Finance ( email )

Miami, FL
United States

Pankaj K. Jain

University of Memphis - Fogelman College of Business and Economics ( email )

Memphis, TN 38152
United States

Suchismita Mishra

Florida International University (FIU) - Department of Finance ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

Robinson Reyes-Peña (Contact Author)

Florida International University ( email )

University Park
11200 SW 8th Street
Miami, FL 33199
United States

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