Information absorption in stocks with short-selling constraints

Abstract

We use a Japanese dataset with unique regulatory features to examine information absorption in stocks with short-selling constraints. Japanese stock exchanges place short-sales restrictions on a specific subset of stocks and have distinctive regulations pertaining to seasoned equity offerings (SEOs). In sharp contrast to the United States, no offer-related information is released on the Japanese SEO issue date. We observe a significant price reaction on the issue date only for short- sales restricted stocks, manifested when additional shares are introduced. We posit that the phenomenon is attributable to short-sales restrictions causing a delayed reaction to the stale publicly available information, to which the market has already reacted at its announcement.