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

63 Pages Posted: 22 Jan 2021 Last revised: 1 Apr 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, primarily good news in the US and bad news in China, and improve 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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