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Short-sale constraints and stock price crash risk: causal evidence from a natural experiment

Citation

Deng, X and Gao, L and Kim, JB, Short-sale constraints and stock price crash risk: causal evidence from a natural experiment, Journal of Corporate Finance Article 101498. ISSN 0929-1199 (2019) [Refereed Article]

Copyright Statement

© 2019 Elsevier B.V. All rights reserved.

Official URL: https://www.sciencedirect.com/science/article/pii/...

DOI: doi:10.1016/j.jcorpfin.2019.101498

Abstract

We examine the relation between short-sale constraints and stock price crash risk. To establish causality, we take advantage of a regulatory change from the Securities and Exchange Commission (SEC)ís Regulation SHO pilot program, which temporarily lifted short-sale constraints for randomly designated stocks. Using Regulation SHO as a natural experiment setting in which to apply a difference-in-differences research design, we find that the lifting of short-sale constraints leads to a significant decrease in stock price crash risk. We further investigate the possible underlying mechanisms through which short-sale constraints affect stock price crash risk. We provide evidence suggesting that lifting of short-sale constraints reduces crash risk by constraining managerial bad news hoarding and improving corporate investment efficiency. The results of our study shed new light on the cause of stock price crash risk as well as the roles that short sellers play in monitoring managerial disclosure strategies and real investment decisions.

Item Details

Item Type:Refereed Article
Keywords:regulation SHO, short-sale constraints, stock price crash risk, financial reporting environment, corporate investment efficiency
Research Division:Economics
Research Group:Applied Economics
Research Field:Financial Economics
Objective Division:Commercial Services and Tourism
Objective Group:Financial Services
Objective Field:Finance Services
UTAS Author:Deng, X (Dr Xiaohu Deng)
ID Code:134600
Year Published:2019
Deposited By:Economics and Finance
Deposited On:2019-08-22
Last Modified:2020-04-24
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