The No-Short Return Premium
41 Pages Posted: 24 Jan 2017 Last revised: 29 Mar 2019
Date Written: March 27, 2019
Using the unique regulatory setting from the Hong Kong stock market with both shortable and no-short stocks, we document that no-short stocks on average earn significantly higher average returns than shortable stocks. Furthermore, stocks that comove more with the portfolio of no-short stocks than with the portfolio of shortable stocks on average earn higher subsequent abnormal returns. Additions to and deletions from the shorting list only partially contribute to the no-short return premium. To interpret our findings, we provide a theoretical model showing that rational investors’ discounting for the mispricing risk of no-short stocks can lead to the no-short return premium.
Keywords: Short-Sale Regulation; Return Comovement; Limits to Arbitrage; Mispricing
JEL Classification: G02; G10; G12; G28
Suggested Citation: Suggested Citation