Short-Selling Constraints and Stock-Valuation Pattern: A Regime-Event Analysis

Employing a novel approach of integrating regime analysis with event analysis, we examine the overall valuation pattern of stocks that traverse the short-sale-ban and the no-ban regime, employing data from the Hong Kong market. Switching from the ban to the no-ban regime, stocks initially undergo net cumulative undervaluation and then revert to fundamental valuation. Switching from the no-ban to the ban regime, stocks initially experience net cumulative excessive overvaluation and then revert to permanent overvaluation. The amount of net cumulative undervaluation is greater than the amount of net cumulative excessive overvaluation. This documented overall pattern offers a broad perspective on short-sale constraints and stock valuation.