Constraints on short-selling and asset price adjustment to private information |
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| Institution: | 1. Newcastle Business School, University of Newcastle, University Drive, Callaghan, NSW 2287, Australia;2. Adelaide Business School, University of Adelaide, 10 Pulteney St, Adelaide, SA 5000, Australia;1. Department of Finance, Auckland University of Technology, Private Bag 92006, Auckland 1142, New Zealand;2. Department of Finance, University of Texas at San Antonio, One UTSA Circle, San Antonio, TX 78249-0631, USA;1. Shenzhen Audencia Business School, Shenzhen University, Shenzhen 518060, China;2. Audencia Business School, Nantes 44300, France;3. Department of Finance, Lee Kong Chian School of Business, Singapore Management University, Singapore;4. Department of Finance, Strome College of Business, Old Dominion University, Norfolk, VA 23529, USA |
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| Abstract: | This paper models effects of short-sale constraints on the speed of adjustment (to private information) of security prices. Constraints eliminate some informative trades, but do not bias prices upward. Prohibiting traders from shorting reduces the adjustment speed of prices to private information, especially to bad news. Non-prohibitive costs can have the reverse effect, but this is unlikely. Implications are developed about return distributions on information announcement dates. Periods of inactive trade are shown to impart a downward bias to measured returns. An unexpected increase in the short-interest of a stock is shown to be bad news. |
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