While numerous contemporary finance theories are established upon the hypothesis of efficient market hypothesis, there exist various constraints on worldwide stock exchanges that limit arbitrage activities, which underlie the hypothesis. The exemption of short-sale restriction for the component stocks of the Taiwan 50 index in May, 2005 offers us a great natural experiment laboratory to examine the efficiency impact of the short-sale constraint. We find that short-sale constraint indeed depresses the demand for short selling, and the exemption of short sale constraint does not lead to significant fall on stock prices. Furthermore, information reflected through negative returns and positive returns are more in accordance with each other in the regime without short-sale constraint. The results suggest that the suspending short-sale price constraint has significantly enhanced overall pricing efficiency on the Taiwan Stock Exchange.
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