Abstract
The National Pension Service (NPS) of Korea suddenly announced that they would suspend their stock lending business from October 22, 2018. Using this ideal setting, the authors investigate the effects of this suspension on market quality and short-selling activities. The authors find that stock return does not increase after the suspension of stock lending for both the KOSPI and KOSDAQ markets. However, the returns of stocks with NPS ownership decline less than those without NPS ownership. The authors also find that the institutional and foreign investors' short sales did not increase in both markets after the lending business suspension by the NPS. In addition, the effect of suspension of stock lending on market quality is mixed, so the authors cannot conclude that market quality has improved. Overall, the authors’ results indicate that the stock market, especially for short-sales activity, has not been affected by the suspension of the stock lending service by the NPS.
Highlights
The National Pension Service (NPS) of Korea suddenly announced that they would suspend their stock lending business from October 22, 2018
In the DID analysis, we show that stocks tend to be more illiquid and have high volatility after NPS suspends stock lending for both NPS and NonNPS stocks, but the increasing magnitude is smaller for NPS stocks than for NonNPS stocks
We find contradictory results in the regression analysis: the bid-ask spread and standard deviation of daily return are reduced for stocks with NPS ownership after NPS suspends stock lending in the KOSPI market
Summary
“We have stopped lending stocks from October 22 after an internal discussion,” said Kim Sung-Joo, NPS CEO in the Congressional audit hearing on October 23, 2018. Short-sales constraints arising from the NPS might affect the investment decisions of other institutional or individual investors, which further affect the stock market quality and short-selling trades. We examine whether the NPS suspends stock lending to improve market quality and reduce short-selling activity, especially for institutional and foreign investors. To the best of our knowledge, this is the first study that examines the impact of stock lending of the public pension fund on stock market quality and short-selling activity. The solid line represents the market relss and the dotted line is the market index appears that short-selling activity increases before the stock market index drops This result is consistent with Wang and Lee (2015) and Diether et al (2009b), who show that short-sellers are contrarian in the Korean and US stock markets, respectively. Another possible explanation is that around our event date, the stock market has a shock that causes a decline in the stock market
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