The Effect of Short Selling Constraints on Earning Announcements: the Case of Hong Kong
Abstract (via Kadapakkam)
In Hong Kong, only designated securities are eligible for short-selling. In contrast to U.S., short interest for eligible securities is disclosed on a daily basis. We examine the effect of short selling constraints on price reactions to earnings announcements. We provide evidence that the removal of short selling constraints does not reduce the information content of earnings announcements. Further, there is no relationship between the abnormal level of short interests prior to earnings announcement and announcement date return.
Excerpted Conclusion (via Kadapakkam)
Unbounded short selling is one of the major assumptions in many conventional financial theories, but actually short selling is highly regulated in most financial markets around the world. Many regulatory agencies are worried that short selling without restrictions might disturb the market and trigger a big crash. We examine this issue by using data from the Hong Kong Stock Exchange, on which only some securities are eligible for short-selling. Thus, we can analyze the impact of short-selling controlling for other institutional factors. Preliminary results indicate that allowing short selling has very limited effects. Even for negative earning shocks, short selling eligibility does not significantly change the information content of earnings announcement. The magnitude of stock price reactions to unanticipated earnings shock remains unaltered. Further, abnormal returns to earnings announcements cannot be explained by unusual level short interest prior to earnings announcement.