Abstract
We present evidence demonstrating that short-sale constraint is another nonnegligible cause why information diffuses slowly across the stock market. Based on data from Chinese market, we document several findings showing that short-sale constraint significantly delays incorporating the information from supply-chain industries. First, negative information from supply-chain industries exhibits stronger predictive ability; second, the cross-predictability of the set of stocks decreases substantially after the removal of short prohibitions; third, the cross-predictability of short-prohibited stocks is more pronounced than that of short-allowed stocks.
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