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Short-sale constraints: Reductions in costs of capital or overvaluation? Evidence from Hong Kong

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  • Chang, Eric C.
  • Cheng, Joseph W.
  • Pinegar, J. Michael
  • Yu, Yinghui
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    Abstract

    We examine the effects of short-sale constraints in Hong Kong where stocks can be shorted only if they are included on an official short-sale list. Using revisions to the list, we test two hypotheses — 1) that short-sale constraints lead to overvaluation and 2) that they lead to lower costs of capital. We find weak support for the Diamond and Verrecchia (1987) version of the overvaluation hypothesis, but more compelling evidence supporting the Xu (2007) version of the overvaluation hypothesis and the cost of capital hypothesis. We argue that in the context of our tests the Xu overvaluation hypothesis is actually a reformulation of the cost of capital hypothesis and that the bulk of our evidence, therefore, supports the notion that short-sale constraints reduce capital costs.

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    Bibliographic Info

    Article provided by Elsevier in its journal Pacific-Basin Finance Journal.

    Volume (Year): 20 (2012)
    Issue (Month): 3 ()
    Pages: 506-520

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    Handle: RePEc:eee:pacfin:v:20:y:2012:i:3:p:506-520

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    Web page: http://www.elsevier.com/locate/pacfin

    Related research

    Keywords: Short-sale constraints; Asymmetric changes in risk; Idiosyncratic skewness; Cost of capital;

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    References

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    Cited by:
    1. Lensberg, Terje & Schenk-Hoppé, Klaus Reiner & Ladley, Dan, 2012. "Costs and Benefits of Speculation," Discussion Papers 2012/12, Department of Business and Management Science, Norwegian School of Economics.

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