Abstract
AbstractTaking the gradual lifting of short‐sale bans in China as natural experiments, the paper shows that mutual funds reduce the number of shares in shortable stocks compared to short‐selling forbidden stocks after short‐selling reforms, and their selling is more intensive in stocks with higher valuation, larger market value, higher profitability, more media coverage or better corporate governance. These strategies are not just short‐term reactions, nor are they applied by other institutional investors. Short‐sellers process negative information to dampen overvaluation or spread pessimistic beliefs which undervalue high quality, so mutual funds’ negative reaction towards short‐selling is stronger among overvalued or high‐quality stocks.
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