Abstract
This study focuses on the distinctive incident in which Stock Lending and Borrowing (SLB) transaction and short selling grew continuously even during the wavering period of the Korea Composite Stock Price Index (KOSPI) in the Korea Exchange (KRX) market. The authors analyze the information contents of SLB and short selling on KOSPI financial stocks. The financial stocks were freed from short selling ban on November 14, 2013, after being banned for more than five years following the global financial crisis in 2008. Employing the event study methodology, the authors also analyze the differences between stock market returns before and after the short selling ban. The results of this study show that the concentrated group including high levels of SLB and short selling were characterized by the higher Abnormal Return (AR) with negative effect than the comparative group after the occurrence of short sales. The results also discover that SLB and short selling transactions provide the market with significant information contents. The information effect of SLB and short selling is consistent over time, but is stronger when the transactions are more concentrated. Finally, the results reveal that the short selling has the most considerable influence on the stock market.
Highlights
The Korea Stock Composite Index (KOSPI) has not broken out of the box pattern of 1,800~2,100p during six years in the Korea Exchange (KRX) stock market since 2010
While the short selling of financial stocks had been restricted since the 2008 global financial crisis, the restriction was lifted on November 14, 2013 (Financial Services Commission, www.fsc.go.kr)
To analyze the information effect of Stock Lending and Borrowing (SLB) and short selling, this study divided the target firms into two groups: The focus group (Group A) which is comprised of the stock price of the top 15 firms of SLB and short selling, and the comparative group (Group B) which is comprised of the stock price of 15 bottom firms
Summary
The Korea Stock Composite Index (KOSPI) has not broken out of the box pattern of 1,800~2,100p during six years in the Korea Exchange (KRX) stock market since 2010. The trading proportion of the top fifteen financial stocks in comparison to the other stocks increased from 2.7 to 4.4% (+64.2%) and the trading value increased from 5.3 to 6.8% (+28.3%) This rapid increase shows the opposite trend observed in November and December 2013 when the total balance of SLB stagnated or considerably decreased in the year end. It is observed that during the period from November 14 until November 30, when short selling was permitted after 5 years, the cumulative proportion of short selling was 17% of the total trading volume of short selling, valued at 9.8% This indicates that a considerable amount of short selling was practiced during that period, which in turn, remarkably affected the market
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