| We employ a novel equity loan database to study the effect of short-sale constraints on the informational efficiency of stock prices. Specifically, we use a direct measure of short-selling costs to test the Diamond and Verrecchia (1987) hypothesis that short-sale constraints reduce the speed at which prices adjust to private information. We show that stocks for which short-selling is particularly costly have larger price reactions to earnings announcements, especially to bad news. We confirm the prediction that the distribution of announcement-day returns will be more left-skewed and returns will be larger in absolute value. Furthermore, the fraction of long-run price reaction realized on the day of the announcement is smaller when short-selling is constrained. |
