Short sales constraints and price adjustment to earnings announcements

Bai, M
Qin, YF
Tournai-Rad, A
Item type
Conference Contribution
Degree name
Journal Title
Journal ISSN
Volume Title
Australian Business School, the University of New South Wales

This study looks at how short sales constraints affect the stock price adjustment to the release of public information in the Hong Kong Stock Exchange for a sample of 4,757 firm-event observations over the period 1994-2011. Using a unique feature of this market that allows us to directly investigate the impact of the imposition of short sales restriction, we find following results. First, nonshortable stocks react more strongly to negative information than shortable stocks. Second, nonshortable stocks are overpriced before the negative earnings announcement. Hence, part of the strong market reaction of nonshortable stocks on announcement day could be due to the correction of such overpricing. Third, prices of nonshortable stocks reverse following the announcement of negative information, suggesting that investors overreact to the negative information on the announcement day. Fourth, it takes longer time for the prices of nonshortable stocks to fully adjust to the negative earnings information. On the whole, our results are supportive of the stream of research that finds the imposition of short sales restrictions reduce the efficiency of stock markets.

Short sales constraints , Earnings announcement , Post-event analysis
26th Australasian Finance and Banking Conference held at Shangri-La Hotel, Sydney, Sydney, 2013-12-16 to 2013-12-19
Rights statement
NOTICE: this is the author’s version of a work that was accepted for publication. Changes resulting from the publishing process, such as peer review, editing, corrections, structural formatting, and other quality control mechanisms may not be reflected in this document. Changes may have been made to this work since it was submitted for publication. A definitive version was subsequently published in (see Citation). The original publication is available at (see Publisher's Version).