Asset Pricing Implications of Short-sale Constraints in Imperfectly Competitive Markets
Management Science, 2019, 65 (9), 4422-4439
60 Pages Posted: 4 Apr 2013 Last revised: 12 Aug 2020
Date Written: April 14, 2017
Abstract
We study the impact of short-sale constraints on market prices and liquidity in imperfectly competitive markets in which market-makers have market power. We show that, with or without information asymmetry, short-sale constraints decrease bid prices, but increase bid-ask spreads and liquidity-risk. If market-makers are risk-averse, short-sale constraints also increase ask prices. In addition, the impact of short-sale constraints can increase with market transparency. Our main results are unaffected by endogenous information acquisition or reduced information revelation due to short-sale constraints.
Keywords: Short-sale Constraints, Bid-Ask Spread, Information Acquisition, Imperfect Competition, Welfare
JEL Classification: D42, D53, D82, G12, G18
Suggested Citation: Suggested Citation
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