Distribution of Ownership, Short Sale Constraints, and Market Efficiency: Evidence from Cross‐Listed Stocks

Abstract

We investigate the interplay between the distribution of ownership, short sale constraints, and market efficiency. Using minute‐by‐minute data during the period surrounding the short sale ban of 2008, we demonstrate that short sale restrictions cause price disparities among cross‐listed stocks when ownership in the stocks is distributed unevenly across the two markets. The stocks tend to trade at a premium in the market where long sellers are relatively scarcer, which reduces the speed at which prices adjust to bad news. The premium is driven primarily by an increase on the ask side of the market where ownership is thinner, is only evident when prices are moving down, and disappears quickly.

Price Discovery of Internationally Cross‐listed Stocks During the 2008 Financial Crisis

“…The latter result indicates that the price impact of a 1,000‐share trade rose by approximately 1.1% on the NYSE versus the TSX during the short‐selling ban period for the eight financial firms. Our results are consistent with Gagnon and Witmer's () findings.…”

“…The latter result indicates that the price impact of a 1,000-share trade rose by approximately 1.1% on the NYSE versus the TSX during the short-selling ban period for the eight financial firms. Our results are consistent withGagnon and Witmer's (2014) findings.10 Because all our sampled financial stocks are domiciled in Canada, the slope on the short-selling dummy variable in our simple linear regressions may capture a combined effect of the short-selling ban and Canadian versus emerging markets effects. We provide a more relevant measure of the short-selling ban effect in our panel regressions, which control for many cross-sectional stock characteristics.…”

Short selling and intraday volatility: evidence from the Chinese market

“…Kolasinski et al ( 2013 ) show that the short selling restrictions do not reduce informed trading activities and may result in an increase by increasing the proportion of informed short sellers to uninformed ones. Some international evidences can also be found in Clifton and Snape ( 2008 ) and Gagnon and Witmer ( 2014 ). Specifically, for the Asia—Pacific market, Chang et al ( 2007 ) find that short selling restrictions tend to cause the individual stock overvaulted.…”

Lost in Translation: Which Stock Prices Bear the Burden to Adjust to Exchange Rates?

“…The ban was imposed on eight of the financial companies in our sample. The latter control variable offers a test of the effects of the short selling constraint and complements the work of Gagnon and Witmer () who show that relative bid–ask spreads for short‐banned financial stocks rose in the United States versus in Canada, driven primarily by rising ask prices due to thinner ownership in the United States, leading to a delay at which U.S. prices adjusted to bad news. Also, Blau et al () show that short selling bans have clear implications for price discovery.…”