Short selling restrictions and market completeness: The Malaysian experience

Abstract

We examine the market's reaction around a series of events on the Kuala Lumpur Stock Exchange (KLSE) where the Malaysian government removed short selling restrictions on selected stocks and then subsequently reimposed these restrictions. These events provide a unique opportunity to analyse the effects of short selling restrictions on the price formation process in an emerging market. It has been argued that the impact on prices from incorporating negative information via short sales should lead to a correction of the upward bias in prices prevalent under short selling restrictions. This should result in lower prices and observed returns around the announcement of the removal of short selling..