Information Absorption in Stocks with Short-Selling Constraints

Under short-sales restrictions, we document a phenomenon where the market reacts again to publicly available adverse information, to which it has already responded before. We employ a Japanese dataset endowed with distinctive regulatory features pertaining to trading restrictions for a specific subset of stocks. Japanese SEOs also have unique regulatory aspects. Specifically, a Japanese SEO’s issue date, by regulation, is a minimum of five trading days from its pricing date. We posit that when an SEO is announced for short-sales restricted stocks, pessimistic investors are initially kept at abeyance and restricted from responding freely until the issue date, to the offering-related adverse information. The price reaction on the issue date, is to the now stale information to which the market has already reacted at its announcement. The phenomenon is attributable to a delayed reaction to publicly available information for short-sales restricted stocks, manifested only when additional shares are introduced.