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

See all articles by Hong Liu

Hong Liu

Washington University in St. Louis - Olin Business School; Fudan University - China Institute of Economics and Finance

Yajun Wang

City University of NY, Baruch College, Zicklin School of Business

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

Liu, Hong and Wang, Yajun, Asset Pricing Implications of Short-sale Constraints in Imperfectly Competitive Markets (April 14, 2017). Management Science, 2019, 65 (9), 4422-4439, Available at SSRN: https://ssrn.com/abstract=2243305 or http://dx.doi.org/10.2139/ssrn.2243305

Hong Liu

Washington University in St. Louis - Olin Business School ( email )

One Brookings Drive
Campus Box 1133
St. Louis, MO 63130-4899
United States
314-935-5883 (Phone)

Fudan University - China Institute of Economics and Finance ( email )

China

Yajun Wang (Contact Author)

City University of NY, Baruch College, Zicklin School of Business ( email )

One Bernard Baruch Way
New York, NY 10010
United States

HOME PAGE: http://sites.google.com/site/yajunwangfin/

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