Empirical analysis reveals muted price responses for cross-listed stocks under home short selling bans, indicating that investor belief dispersion directs cross-border regulatory arbitrage.
We evaluate the role of short sale bans in muting the price response to negative earnings surprises for stocks cross‐listed in foreign unbanned markets. We update the global timeline of short sale restrictions up to the COVID‐19 crisis. Given low dispersion of beliefs, we observe that the effects of a stock's home market bans extend to unbanned markets, as manifested in lagged price responses, reduced short interest, and failures to deliver. In contrast, large profit opportunities created by high dispersion of beliefs trigger cross‐border short selling (regulatory arbitrage) and a leading price response in foreign unbanned markets vis‐à‐vis the home market.
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Hu et al. (2024) studied this question.
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