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Short sales constraints and stock returns: How do the regulations fare?

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  • Khan, Mostafa Saidur Rahim
  • Kato, Hideaki Kiyoshi
  • Bremer, Marc

Abstract

This study examines the effect of regulations on the return behavior of short sales constrained stocks in the Japanese stock market. Since legal restrictions hinder short selling, the subsequent underperformance of highly shorted stocks is hypothesized to be more pronounced during periods when these regulations are stronger. On the basis of actual rules on short sales, the period from January 2012 to October 2013 is defined as a high regulation period and the period from November 2013 to July 2016 is defined as a low regulation period. Using all stocks listed on the Tokyo Stock Exchange and the JASDAQ Securities Exchange, this research finds evidence that short sales constrained stocks are generally overvalued but also that the subsequent underperformance of maximally shorted stocks compared to minimally shorted stocks does not differ significantly across regulatory regimes. This study concludes that the underperformance of short sales constrained stocks is linked to market-oriented restrictions such as the inability to borrow stock to sell short. Legal restrictions on short sales do not appear to create additional distortions in stock prices.

Suggested Citation

  • Khan, Mostafa Saidur Rahim & Kato, Hideaki Kiyoshi & Bremer, Marc, 2019. "Short sales constraints and stock returns: How do the regulations fare?," Journal of the Japanese and International Economies, Elsevier, vol. 54(C).
    • Handle: RePEc:eee:jjieco:v:54:y:2019:i:c:s0889158319300401
    DOI: 10.1016/j.jjie.2019.101049
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    More about this item

    Keywords

    Short sales; Regulation; Underperformance; Stock returns; Japan;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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