Informed Trading with a Short-Sale Prohibition
Management Science · 2021 · Volume 67 · Issue 3
Abstract
Using a rational expectations equilibrium framework, I evaluate the effects of a short-sale prohibition in an economy with asymmetrically informed investors who are identical except for their information sets. Relative to an economy in which short selling is permitted, the financial market is less informationally efficient under a short-sale ban even when the ban is not binding. This alters the risk-sharing environment and leads to an increase in information acquisition. Additionally, a short-sale prohibition increases market depth. Imposing a cost on short selling instead of a strict prohibition yields similar results. Novel empirical implications are identified. This paper was accepted by Karl Diether, finance.
Keywords
asymmetric information, short selling, financial institutions, markets
Enable JavaScript for citation tools and additional paper interactions.