Short Sale Constraints and Corporate Investment

We examine the effect of short sale constraints on corporate investment in a sample of non-US regulatory regime shifts. As expected, regulatory changes reducing short sale constraints are associated with stock price declines, reduced capex, and lower asset growth. In contrast to US studies, however, we find the price decline and investment effects are more pronounced for larger firms. We also show that the investment effects are more pronounced for firms that relied previously on external financing. Our results suggest the investment effect in non-US economies is not a manifestation of capital constraints, but may arise from equity mispricing alone