Short-sale constraints: Reductions in costs of capital or overvaluation? Evidence from Hong Kong

Eric C. Chang, Joseph W. Cheng, J. Michael Pinegar and Yinghui Yu

Pacific-Basin Finance Journal, 2012, vol. 20, issue 3, 506-520

Abstract: We examine the effects of short-sale constraints in Hong Kong where stocks can be shorted only if they are included on an official short-sale list. Using revisions to the list, we test two hypotheses — 1) that short-sale constraints lead to overvaluation and 2) that they lead to lower costs of capital. We find weak support for the Diamond and Verrecchia (1987) version of the overvaluation hypothesis, but more compelling evidence supporting the Xu (2007) version of the overvaluation hypothesis and the cost of capital hypothesis. We argue that in the context of our tests the Xu overvaluation hypothesis is actually a reformulation of the cost of capital hypothesis and that the bulk of our evidence, therefore, supports the notion that short-sale constraints reduce capital costs.

Keywords: Short-sale constraints; Asymmetric changes in risk; Idiosyncratic skewness; Cost of capital (search for similar items in EconPapers)
JEL-codes: G18 G32 P34 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (9)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:20:y:2012:i:3:p:506-520

DOI: 10.1016/j.pacfin.2011.12.005

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