Short-Sales Effect Examination

What short-sales mechanism would bring to capital market remains acontroversial topic. Many financial markets around the world ban short-sales tocertain extent, fearing that short-sales would destabilize the market and be employedby speculators to sell down companies. On the other hands, many scholars as well aseconomists argue that short-sales restrictions would hinder price discovery and keepnegative information out of door temporally which results in market crash later on.This paper takes advantage of the unique setting of A+H shares to exam theimpact of short-sales constraints. Though of the same company fundamentals, A sharetraded in mainland market is not eligible for short-sales while H share traded in HongKong market follows a unique practice that only stocks meeting certain criteria areeligible for short-sales.We investigate the short-sales constraint impact by comparing those H shareeligible for short-sales with those not using A share as a benchmark. Comparisons areconducted from three aspects: efficiency, volatility and market crash.Empirical testing shows that stocks eligible for short-sales are more efficientsince they respond to market information more quickly than those not eligible forshort-sales which supports the theory that short-sales help in price discovery.Research conducted also indicates that shortable stocks are less volatile than those notand thus is consistent with the logic that short-sales smooth market fluctuation at leastfrom individual stock perspective. The last testing tries to exam the theory thatshort-sales constraints lead to market crash. However, no strong evidence is shownhere.