How price limit affects the market efficiency in a short-sale constrained market? Evidence from a quasi-natural experiment
Chen, Haiqiang; Gu, Ming; Ni, Bo
JOURNAL OF EMPIRICAL FINANCE Year: 2023 Volume: 73.0
DOI: 10.1016/j.jempfin.2023.05.003
Abstract: In this paper, we examine the joint effect of price limit and short-sale constraints on price discovery. Using a natural experiment in China, we show the exogenous relaxation of price limit improves price efficiency. Importantly, shortable stocks experience more improvement in price efficiency than non-shortable stocks. Event-study analysis further documents less delayed price discovery following the price-limit-hitting event on shortable stocks, which is explained by selling pressure from large institutional orders. Our findings suggest that alleviating shortsale constraints could synergize with the relaxation of trading restrictions to improve price efficiency.
