Title: Short-Sales Constraints and Price Discovery: Evidence from the Hong Kong Market
Reference Number: 1101
Publication Date: March 2004

Eric Chang
The University of Hong Kong

Yinghui Yu
The University of Hong Kong

The short-sales practice in the Hong Kong stock market distinguishes itself in that only stocks on a list of designated securities, revised from time to time, can be sold short. By analyzing the price effects around the changes of the list, we find that short-sales constraints tend to cause stock overvaluation and that the overvaluation effect is more dramatic for individual stocks where wider dispersion of investor opinions exist, which are consistent with Miller (1977)'s intuition and other optimism models. We also document higher volatility and less positive skewness of individual stock returns when short sales are allowed.

Published in Journal of Finance 62:5 (2007), pp. 2097-2121.

Won the Best Paper Award at the 2004 National Taiwan University International Conference.

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Last modified: 10/26/2007