Short-sales constraints and liquidity change: Cross-sectional evidence from the Hong Kong Market

Min Bai () and Yafeng Qin ()

Pacific-Basin Finance Journal, 2014, vol. 26, issue C, 98-122

Abstract: This study investigates the impact of short-sales constraints on liquidity for individual stocks in Hong Kong, as the Hong Kong Stock Market has a special feature such that, at each point of time, only a subset of stocks are allowed to be sold short, with the list of these stocks changing over time. We find that the impact is heterogeneous across stocks: Following the repealing of short-sales constraints, only large, illiquid and inactively traded firms increase in liquidity; while others significantly drop in prices and liquidity. Following the imposing of short-sales constraints, only inactively traded stocks significantly increase in liquidity and prices. The heterogeneous liquidity change also affects the relation between stock overvaluation and one of its necessary conditions — dispersion of investor opinions. When stocks are allowed to be sold short, such a relation is stronger for firms with deteriorating liquidity. When stocks are prohibited from being sold short, this relation disappears among firms with deteriorating liquidity.

Keywords: Short-sales constraints; Liquidity; Stock valuation; Investor opinions dispersion (search for similar items in EconPapers)
JEL-codes: G12 G14 G18 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (13)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:26:y:2014:i:c:p:98-122

DOI: 10.1016/j.pacfin.2013.11.004

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