Informed Trading with a Short-Sale Prohibition

Stephen L. Lenkey ()
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Stephen L. Lenkey: Smeal College of Business, Pennsylvania State University, University Park, Pennsylvania 16802

Management Science, 2021, vol. 67, issue 3, 1803-1824

Abstract: Using a rational expectations equilibrium framework, I evaluate the effects of a short-sale prohibition in an economy with asymmetrically informed investors who are identical except for their information sets. Relative to an economy in which short selling is permitted, the financial market is less informationally efficient under a short-sale ban even when the ban is not binding. This alters the risk-sharing environment and leads to an increase in information acquisition. Additionally, a short-sale prohibition increases market depth. Imposing a cost on short selling instead of a strict prohibition yields similar results. Novel empirical implications are identified. This paper was accepted by Karl Diether, finance.

Keywords: asymmetric information; short selling; financial institutions; markets (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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