How price limit affects the market efficiency in a short-sale constrained market? Evidence from a quasi-natural experiment

Haiqiang Chen, Ming Gu and Bo Ni

Journal of Empirical Finance, 2023, vol. 73, issue C, 22-39

Abstract: In this paper, we examine the joint effect of price limit and short-sale constraints on price discovery. Using a natural experiment in China, we show the exogenous relaxation of price limit improves price efficiency. Importantly, shortable stocks experience more improvement in price efficiency than non-shortable stocks. Event-study analysis further documents less delayed price discovery following the price-limit-hitting event on shortable stocks, which is explained by selling pressure from large institutional orders. Our findings suggest that alleviating shortsale constraints could synergize with the relaxation of trading restrictions to improve price efficiency.

Keywords: Price limit; Market efficiency; Short-sale constraints (search for similar items in EconPapers)
JEL-codes: G10 G14 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:empfin:v:73:y:2023:i:c:p:22-39

DOI: 10.1016/j.jempfin.2023.05.003

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