活動內容

Topic

Do Short-sale Constraints Restrict Negative Information Revelation?

Speaker

Hong Liu

Professor of Finance, Washington University in St. Louis

Visiting Fulltime Professor of Finance, FISF

Abstract

Existing theories show that short-sale constraints can restrict negative information revelation. Consistent with this conclusion, empirical studies find that the stringency of short-sale constraints has strong predictability of lower future returns. However, the existing literature ignores the information in the sales of investors who have greater incentives or lower costs to acquire information than short sellers. In this paper, we show that short-sale constraints do not reduce negative information revelation if there exist such more informed investors, because their sales (not short sales) reveal more information and short-sale constraints do not affect sales. We provide strong supporting evidence empirically.  For example, conditional on more informed sales (e.g., large institutional sales), we find that short-sale constraints no longer negatively predict returns. We also sharply improve the identification of informed investors using data on illegal insider sales. Our results suggest it is likely that short-sale constraints do not hinder market efficiency and do not cause bubbles.