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

Financial distress risk and stock price crashes

“…Nevertheless, based on the arguments above (e.g. Stein, 1999, 2003;Roychowdhury and Sletten, 2012;Callen and Fang, 2015;An et al, 2020;Deng et al, 2020), it is reasonable to assume that at least a portion of the hitherto undisclosed bad news that managers are strategically concealing from the market spills into the market in the short period preceding the aforementioned tipping point. In this respect, the discovery of such negative information increases the firms' distress risk level within a short period of time, as investors start revising their expectations downwards regarding the firms' true state of economic fundamentals.…”

“…It is not surprising then that many studies (e.g. Hutton et al, 2009;Kim et al, 2011a;Kim et al, 2016;Chang et al, 2017;Deng et al, 2020) have not found statistical support for the positive distress-crash risk relation when leverage is used as a proxy. Interestingly, many other studies (e.g.…”

“…More information is provided here: https://www.sec.gov/litigation/complaints/complr17465.htm.2 An, Chen, Naiker and Wang (2020) argue that investors can anticipate firms' future bad news by gleaning information revealed by media scrutiny, which can expose managerial misconduct and other problems even in the absence of firms' own disclosures. Studies like those ofCallen and Fang (2015) andDeng, Gao, and Kim (2020), add that short sellers analyze information from multiple information channels (beyond earnings as disclosed in financial statements) to promptly detect bad news hoarding activities by firms; they then short those firms' stocks in anticipation of a price crash.…”

Does short‐selling affect mutual fund shareholdings? Evidence from China

“…The main advantage is that the list of firms eligible for being sold short changes over time, which creates both time‐series and cross‐sectional variation in the number of shortable firms. This staggered setting is similar to the Regulation SHO pilot programme in the US market (see Massa et al ., 2015a; Chang et al ., 2019; Deng et al ., 2020), but the difference is, Regulation SHO only exempts pilot stocks from the up‐tick rule and thus reduces the cost of short‐selling, while China’s pilot programme lifts the short‐selling bans on the pilot stocks. Strictly speaking, the pilot programme in China is a cleaner setting to study the impact of short‐sale constraints compared to the Regulation SHO in the US market.…”

“…Short-sellers may have access to internal or perhaps leaked information (Khan and Lu, 2013;Boehmer et al, 2020), or their informational advantage results from advanced technical skill in information mining, collection and analysis (Christophe et al, 2004(Christophe et al, , 2010Karpoff and Lou, 2010;Hirshleifer et al, 2011;Engelberg et al, 2012;Chakrabarty and Shkilko, 2013). Informed short-sellers facilitate the flow of negative information into stock prices, dampen price inflation and thereby improve price efficiency (Chang et al, 2007(Chang et al, , 2014Boehmer and Wu, 2013;Curtis and Fargher, 2014;Deng et al, 2020). However, uninformative or speculative short-sales have also been detected in some studies.…”