Asset Pricing Implications of Short-sale Constraints in Imperfectly Competitive Markets

We study the impact of short-sale constraints on market prices and liquidity in imperfectly competitive markets in which market-makers have market power. We show that, with or without information asymmetry, short-sale constraints decrease bid prices, but increase bid-ask spreads and liquidity-risk. If market-makers are risk-averse, short-sale constraints also increase ask prices. In addition, the impact of short-sale constraints can increase with market transparency. Our main results are unaffected by endogenous information acquisition or reduced information revelation due to short-sale constraints