DYNAMIC SHORT SALE REGULATIONS: IS IT GOOD FOR THE MARKET?

Abstract

The Hong Kong Stock Exchange (HKEx)’s dynamic short-sale regulations are often considered as standard for efficient short sale regulatory framework in Asia. In this study, we first examine the regulatory selection process of shortable stocks on HKEx and present some evidence of misclassification. Specifically, we find that short-selling is not harmful to stocks, even for smaller, potentially easily manipulated stocks. Instead, we find significant mispricing for protected stocks, whose stock characteristics suggest that the stocks should be but are not currently shortable. We further link this source of protectionism and/or systematic mispricing to institutional ownership characteristics, which calls for greater transparency as exchange regulators need to be accountable to alleviate corporate governance issues at the exchanges.