Informed Trading with a Short-Sale Prohibition

Using a rational expectations equilibrium framework, I evaluate the effects of short-sale prohibition in an economy with asymmetrically informed investors who are identical except for their information sets. Relative to which short selling is permitted, financial market less informationally efficient under ban even when not binding. This alters risk-sharing environment and leads increase acquisition. Additionally, increases depth. Imposing cost on instead strict yields similar results. Novel empirical implications identified. paper was accepted by Karl Diether, finance.