Does Removing the Short-sale Constraint Improve Liquidity? Evidence from Hong Kong

摘要

In Hong Kong, only stocks on a list of designated securities can be sold short. We find that allowing for shortselling increases the liquidity of lower priced stocks but not higher priced ones. Lower price and higher price stocks had comparable market capitalizations in our sample. However, lower price stocks had less publicly available information – they had larger adverse selection components in their bidask spreads and less sell-side analyst coverage. We also find that the “uptick rule” significantly decreases the market quality. Finally we do not find any evidence that allowing for shortselling increases total volatilities, upside volatilities, or downside volatilities.