This study explores how the violation of free short selling assumption affects the performance of CAPM and the Fama-French three-factor model, as existing studies show that short-sales constraints affect asset pricing of the stocks. Using data from the Hong Kong Stock Market which has unique regulations on short selling, we conduct both time-series and cross-sectional regression analyses to evaluate the performance of the two models under the short-sales-constraints and the no-constraints market environment. The two models perform much worse in the former environment than in the latter, indicating a significant impact of the short sales constraints on the explanatory power of the models. We then augment the two models with a shortability-mimicking factor. Our results show that the factor has a significant power in explaining both time-series and cross-sectional variation in the size-B/M portfolio returns. The addition of the factor to the two models considerably increases their overall performance.

Using a large-scale proprietary data set from China, we examine the cross-border transmission of policy uncertainty within multinational corporations (MNCs). Our results show that policy uncertainty in MNCs’ home countries negatively affects the capital investment of their foreign subsidiaries. Our analyses of cross-sectional heterogeneity reveal that the effect is strengthened by subsidiary-level investment irreversibility and the dependence of subsidiaries on parent firms, and weakened by bilateral meetings and psychic closeness between the home and host countries. Together these findings suggest that policy uncertainty travels across borders and has a spillover effect on foreign subsidiary investment.