We examine the efficacy of short sale regulations in Hong Kong, where the list of shortable stocks is managed by regulators and is updated quarterly. While regulators generally cautiously restrict short selling to larger stocks, we show evidence of deviations: some large liquid stocks, which appear to satisfy the regulators’ stated selection criteria, are excluded from the list. In the absence of short sellers, these stocks earn positive excess returns after the list is made publicly available; such price impacts possibly represent an unintended consequence of the short sale regulations. We also find that the likelihood of large liquid stocks being excluded from the list increases in the ownership by Chinese institutions. Overall, our findings suggest that regulatory interventions should be made more transparent to maintain price efficiency.

Working paper

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