Does Short-Selling Affect Mutual Fund Shareholdings?

Abstract

Using the gradual lifting of the short-sale ban in the Chinese stock market from 2010 to 2019 as natural experiments, the paper studies mutual funds’ strategies towards short-sales. The difference-in-difference regressions consistently show that mutual funds hold fewer shares when stocks are allowed to sell short, and their shareholding reduction towards short-selling is more intensive in stocks with higher valuation, larger market value, higher profitability, higher investment rate or more media coverage. These results are robust in short-term and long-term sample, annual data and classified funds. Our findings suggest that mutual funds generally dislike short-selling activities, and since short-sellers process negative information to alleviate stocks’ overvaluation, or spread pessimistic beliefs to undervalue high-quality stocks, mutual funds’ dislike towards short-selling reinforces in overvalued or high-quality stocks.