Abstract
This article investigates how margin-trading and short-selling affect stock price efficiency in the Chinese stock market. Using a sample of 205 stocks that are allowed to do margin-trading/short-selling in China after the fifth-round ban lift in 2014, we conducted fixed-effect panel regressions with three proxies for stock price efficiency. The findings support that price efficiency for these stocks is much higher than those that are not. The stocks that are newly added to the list of margin-trading and short-selling also see their price efficiency improve after the event compared to before the event. During a bull market, short selling improves stock price efficiency possibly through increasing liquidity, less information asymmetry, and broader investor base. On the other hand, during a bear market, margin-trading improves efficiency possibly through only liquidity and ownership breadth channels.
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