Abstract
The purpose of this study is to compare the information effect of Stock Lending and Borrowing (SLB) and short selling between the Korea Stock Exchange (KRX) and the New York Stock Exchange (NYSE). While most previous studies analyzed the information effect with a focus on short selling, this study links short selling to SLB and examines how SLB and short selling affect stock prices. Using the data of 40 stocks with the most active records of SLB and short selling from each exchange, we perform a regression analysis to examine the information effect. We find that in the KRX, SLB has a positive effect on short selling and short selling has a negative effect on stock prices. However, in the NYSE, short selling has a significant positive effect on stock prices. This is due to the differences in policies concerning public posting of short selling data. We also find that the effect of volatility on stock prices and the effect of short selling on volatility are all significantly negative in both exchanges. That is, short selling reduces market volatility and thus keeps the market from overheating. Furthermore, the effects are greater during the periods when SLB and short selling are more concentrated.
Highlights
Investors in the stock market use various investment strategies to maximize their investment returns
The study sample consists of a portfolio of 40 stocks with the most active Stock Lending and Borrowing (SLB) and short selling transactions from each exchange
The result show that Lending and Borrowing Rate (LBR) and Lending and Borrowing Growth Rate (LBGR) have a positive effect on Short-selling Rate (SSR) at a 1% significance level
Summary
Investors in the stock market use various investment strategies to maximize their investment returns. Short selling has been one of the most commonly used strategy, which involves Stock Lending and Borrowing (SLB). The KRX requires reporting of SLB and short selling transactions and posts the transaction information publicly. SLB and short selling transactions have been on a consistent rise and used with increasing frequency in the KRX. Despite a weak KOSPI market, SLB and short selling transactions had steadily increased. During 2008-2015, the annual transaction amount increased by 2.4 times, the year-end balance by 4.1 times, the balance of stock lending by 5.4 times and the short selling transaction by more than 2 times. Since November 14, 2013 when the ban on short sale of financial stocks was lifted, SLB and short selling have consistently increased
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