Abstract
Unlike developed countries, the prominent participants in the Taiwanese stock market are individual investors. This study found that retail short-sellers in Taiwan can predict stock prices and perform better with stocks held primarily by retail investors with a preference for lottery-like payoffs. Moreover, short-sellers make lower profits with stocks with lottery features in the absence of the uptick rule. The findings are robust when considering the effect of institutional short selling, alternative lottery-like measures such as retail trading activity, arbitrage risk, and distinct macroeconomic conditions. Overall, the results suggest that retail investors are not necessarily noise traders. Based on divergence-of-opinion theory (Miller, 1977), heterogeneous retail investors make trades due to their differences in sentiments. Meanwhile, retail short-sellers include professionals in profitmaking through short-selling by gauging the gambling propensity of general retail investors. Consequently, removing short-selling restrictions can increase the spillover effect of short-sellers' trading signals and help other retail investors move and adjust their investments in lottery-like stocks.
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