Short sales constraints and price adjustments to earnings announcements: Evidence from the Hong Kong market |
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| Affiliation: | 1. Fisher College of Business, The Ohio State University, Columbus, OH 43215, USA;2. Gabelli School of Business, Fordham University, New York, NY 10023, USA;1. Business Administration Department, IQRA University, Islamabad, Pakistan;2. Department of Business & Management, LUISS Guido Carli University, Rome, Italy;1. Harvard Business School, Soldiers Field, Boston, MA 02163, USA;2. University of Connecticut, Finance Department, Storrs, CT 06269, USA;3. EDHEC Business School, 393 Prom. des Anglais, 06200 Nice, France;4. Boston College, Carroll School of Management, Department of Finance, Chestnut Hill, MA 02467, USA;1. Department of Management Sciences, City University of Hong Kong, Hong Kong, China;2. Institute of Finance and Banking, Chinese Academy of Social Science, Beijing, China; Bank of Communications, Corporate and Institutional Banking Department, Shanghai, China;3. The University of Sydney Business School, Sydney, Australia |
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| Abstract: | This study examines how short sales constraints affect the stock price adjustment to the release of public information in the Hong Kong Stock Exchange. Using a unique feature of this market that allows us to directly investigate the impact of short sales restriction, we find the following. First, non-shortable stocks react more strongly to the publication of negative information than shortable stocks do. Second, non-shortable stocks are overpriced before negative earnings announcements. Hence, part of the strong market reaction of non-shortable stocks on announcement day could be due to the correction of such overpricing. Third, the prices of non-shortable stocks reverse following the announcement of negative information, suggesting that investors overreact to negative information on announcement day. Fourth, it takes longer for the prices of non-shortable stocks to adjust to negative earnings information. On the whole, our results support the research that finds short sales restrictions reduce the efficiency of stock markets. |
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