The Handbook of News Analytics in Finance

7.5 SHORT-SALE CONSTRAINTS

We argue that because individual investors hold small portfolios and don't sell short, attention is more important when choosing stocks to buy (from a huge set of choices) than when choosing stocks to sell (from a small set). Short-sale constraints could contribute to our empirical findings through a somewhat different mechanism. An attention-grabbing event may increase the heterogeneity of investor beliefs about a firm. Individual investors who become bullish are able to buy the stock, but those who become bearish can sell it only if they already own it or are willing to sell short. Institutional investors can both buy and sell. Thus, on average, bullish individuals and institutions buy attention-grabbing stocks while bearish institutions, but not individuals, sell. Attention-grabbing events are therefore associated with net buying by individuals, not because individuals are buying what catches their attention, but because they can't sell what catches their attention; attention-grabbing events increase the heterogeneity of beliefs, while limited portfolios and short-sale constraints restrict would-be sellers.

We believe that increased heterogeneity of beliefs combined with selling constraints may contribute to net buying by individuals around attention-grabbing events. However, even when individuals have the option both to buy or to sell a stock (i.e., when they already own the stock) attention will matter more for buying. If short-sale constraints alone ...