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Does Short Selling Enhance the Allocational Role of Stock Price? Evidence from Hong Kong

We investigate the real effect of short selling on corporate investments and, in particular, examine whether short selling improves managerial learning from stock prices in making investment decisions. We find that short selling improves investment sensitivity to stock price, most likely through a channel that short selling increases stock price informativeness. Using the lifting of uptick rule for index arbitrageurs and market makers as an exogenous shock to short selling intensity, we confirm the causal effect of short selling on managerial learning. Overall, our evidence suggests that short selling enhances the role of stock price in resource allocation.