Abstract
We present empirical evidence that short sales contribute to market efficiency by increasing the speed of price adjustment to not only private/public firm-specific information but also market-wide information. Shortable stocks are characterized by weaker trade continuity and stronger quote reversals. They adjust faster to new information than non-shortable counterparts. These findings remain robust even in an up market condition in which short sales are not binding. The amount of information incorporated in each trade is also significantly higher for shortable than non-shortable stocks in both up and down market conditions. After controlling for firm size, trading volume, liquidity, price and option trading, short sales stand out as one of the significant factors that speed up the price adjustment.
| Original language | English |
|---|---|
| Pages (from-to) | 471 - 483 |
| Number of pages | 13 |
| Journal | Journal of Banking and Finance |
| Volume | 34 |
| Issue number | 2 |
| DOIs | |
| Publication status | Published - 2010 |
| Externally published | Yes |