Short sale constraints,disperse pessimistic beliefs and market efficiency — Evidence from the Chinese stock market |
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| Institution: | 1. School of Economics, The Peking University, China;2. School of Management, Wuhan University of Technology, China;3. Economics and Management School of Wuhan University, China;1. Aix-Marseille Université (AMSE & CNRS & EHESS), Banque de France and CEPII, France;2. ESG Management School, Paris, France;1. School of Finance, China Financial Policy Research Center, Renmin University of China, China;2. Department of Economics, Soka University of America, USA;3. Economics and Management School of Wuhan University, China;4. School of Public Policy and Management, Tsinghua University, China;1. China Financial Policy Research Center& School of Finance, Renmin University of China;2. Department of Economics, The Chinese University of Hong Kong;3. School of Public Policy and Management, Tsinghua University;1. School of Finance, Southwestern University of Finance and Economics, Chengdu, China;2. Western Kentucky University, Bowling Green, KY, USA |
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| Abstract: | In the Chinese stock market, the regulatory agency lists qualified stocks on announcement date and permits investors to sell short on the effective date, a practice that allows us to directly study the impact of short sale constraints. Applying an event study to 511 additions, between February 2010 and August 2013, of individual stocks to the list of securities qualified for short sale, we find that short sale constraints cause individual stocks to be overpriced and that such overvaluation is exclusively related to distortions associated with pessimistic beliefs. In addition, we observe lower volatility, skewness and extreme value frequency of stock returns after short sale constraints are lifted. This implies the emergence of a more appropriate distribution of returns and improved market efficiency at the individual stock level as the range of securities qualified for short selling expands. |
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