ABSTRACT We are among the first to investigate how Generative AI (GenAI) shapes investors' trading activities. Using an AI‐sentiment measure extracted from earnings‐call transcripts to proxy for textual signals, we find notable shifts in trading behaviors around earnings calls. Before the wide deployment of ChatGPT, short selling was aligned with AI‐sentiment, whereas retail trading was not. However, following ChatGPT's deployment, the alignment of retail traders with AI‐sentiment significantly increases, while the alignment of short sellers weakens, albeit insignificantly. Stocks with higher information processing costs exhibit a more pronounced increase in retail trading alignment, scenarios where retail investors are likely to benefit more from AI. Using retail‐AI alignment as a proxy for the extent to which retail investors trade based on AI signals, we show that information asymmetry declines and retail investors' trading profitability improves, whereas short sale profitability declines in high retail‐AI alignment stocks. Exogenous outages reduce the alignment between retail trading and AI‐sentiment, allowing us to draw causal inferences. Collectively, this study suggests that AI is a promising technology for narrowing the information gap in the trading of complex textual financial disclosures between investor classes with clear disparities in the ability to process public disclosures.

Net arbitrage trading by foreign investors and short sellers and stock returns: Evidence from the Korean stock market

Short selling and the probability of informed trading: Insights from interlocking directorate networks

ABSTRACT This study utilizes the unique institutional setting created by the pilot scheme of lifting the ban on margin buying and short selling in the Chinese A-share market in March 2010. Specifically, this study tests Miller’s (1977) hypothesis and examines the impact of opinion divergence and lifting short-selling constraints on the stock market based on the daily data of 2919 Chinese A-share listed companies from 2008 to 2019. The findings reveal a positive correlation between opinion divergence and stock returns. However, changing short-selling regulations yields mixed results. Increased short selling is associated with higher stock returns and amplifies the positive relationship between opinion divergence and stock returns. Conversely, increased margin trading reduces stock returns, making the positive relationship between divergent opinions and stock returns less pronounced.

This paper introduces the Best Sharia-based Capital Asset Pricing Model (BSCAPM), a mathematical modification of the BCAPM model integrating Islamic finance principles. The study focuses on optimizing the beta in the model, incorporating factors aligned with Islamic principles, such as zakat and purification, while excluding short selling. Using data from the Jakarta Islamic Index (JII) from June 2020 to May 2024, the BSCAPM portfolio outperforms the BCAPM portfolio in terms of the Sharpe ratio. The results suggest that BSCAPM could serve as an effective alternative for modeling in Islamic investments, providing Muslim investors with a Shariah-compliant, optimal portfolio formation model. The research contributes to the underexplored domain of portfolio selection modeling in the Islamic sector, enriching references on asset pricing of Shariah portfolios, particularly in the Indonesian Shariah stock market.

This study uses samples of Chinese A-Shares non-financial listed companies from 2007 - 2019, combined with the phased implementation of the margin trading system as a quasi-natural experiment, to study whether short-selling mechanism is affected by the rule of law and how the rule of law moderates the impact of short-selling mechanism on the earnings management of non-financial listed companies of Chinese A-share. Short selling curbs both accrual-based and real earnings management (beta=-0.012 and-0.015), and it restrains real earnings management more. The rule of law has a positive moderating effect on this governance effect, the suppression of earnings fraud is significantly higher in high rule of law (DA: -0.018,REM:-0.020) compared to low rule of law (DA: -0.006,REM:-0.007) places. Heterogeneity analysis shows that the moderating effect is more pronounced on non-state owned firms and regulated industries. From the mechanism tests, this study can see that short selling restrains earnings management by improving the information transparency and reinforcing financing constraints. The analyst coverage and institutional ownership will boost the effect. This study proposes judicial coordination, different treatment for short sale targets, and to build a 'law-short selling' risk early warning mechanism.

This paper exploits individual trading records from a large brokerage service to investigate the trading patterns of retail investors who take short positions in stocks using contracts for differences (CFDs). Their risk tolerance, as reported in MiFID II questionnaires, and their leverage usage indicate greater risk-seeking behavior. Short positions, compared to long positions, constitute larger portions of overall portfolios and are more highly leveraged. Yet, short sellers’ research activity does not suggest that they increase the amount of attention paid to stocks before taking short positions. Compared with other CFD traders, short sellers perform worse, and their profit variability is greater.

Short-selling is common in financial markets but is also strictly regulated. When short selling is banned, heterogeneous beliefs determine which investors take long positions and which have constrained positions of zero in equilibrium. Solving such models is computationally intensive. We set out three algorithms suited to solving models with very large numbers of investor types – such as millions – quickly on a standard laptop or desktop computer. The fastest algorithm combines price iterations with a divide and conquer approach. As an application we study the impact of a short-selling ban on price dynamics and wealth distribution in a market of many investor types in evolutionary competition, and we observe that both can be affected substantially.

Purpose This study investigates how short sellers respond to monetary policy uncertainty (MPU) in China’s A-share market and whether firm-level characteristics moderate this relationship. Design/methodology/approach Using panel data and MPU indices, we estimate regression models with firm and time fixed effects. We also explore heterogeneous effects based on ownership type and managerial shareholding. Findings Short-selling activity increases during periods of high MPU. The effect is more pronounced for non-state-owned firms and those with higher managerial ownership, suggesting greater sensitivity to uncertainty due to financial and governance constraints. Originality/value This paper links macro-level policy uncertainty to micro-level trading behavior in an emerging market. It highlights how ownership and governance structures shape firm responses to uncertainty, offering new insights into the role of short sellers in monetary policy transmission.

We examine whether ownership by benchmarked investors constrains short sellers’ ability to quickly cover their positions following positive earnings news and thereby exacerbates price pressure from short covering. We find that high benchmarked ownership is related to greater price overshooting in highly shorted stocks at positive earnings announcements. This effect is driven by benchmarked ownership amplifying both price and volume impacts of short covering. Exploring shocks from Russell index reconstitutions and examining other settings such as management guidance and analyst recommendation revisions yield similar inferences. Overall, our findings highlight a novel mechanism that benchmarked ownership can constrain short-selling activities. This paper was accepted by Eric So, accounting. Funding: The authors acknowledge financial assistance from their respective schools. Supplemental Material: The online appendix and data files are available at https://doi.org/10.1287/mnsc.2024.07231 .

US federal regulators impose enforcement actions on banks when they discover breaches of fiduciary duty. We find that short sellers anticipate enforcement actions 6 months before issuance, regardless of the state of the economy. After the infractions are settled, short selling decreases for banks with certain characteristics. Further, we find that large banks face less scrutiny from short sellers ahead of enforcement actions, a potential benefit of being Too Big to Fail. These findings may suggest that short interest serves as a signal for declining bank quality ahead of a formal investigation and improving conditions after the settlement.

Abstract One of the most pressing regulatory issues of our time is whether, when, and how short selling should be regulated. Short selling facilitates the dissemination of negative information that is otherwise not available to the marketplace, thereby improving market efficiency. However, it may also disrupt market stability, particularly during times of stress. Therefore, regulators seek to regulate this market practice in a balanced manner. This paper examines the Korean short selling regime, the world’s longest ban, instituted following the COVID-19 pandemic. It argues that the regulatory system is run on archaic methods. In particular, our analysis demonstrates that the rules are overly restrictive and complex compared to those in other major jurisdictions. Also, critical decisions are entirely at the government’s discretion, rendering it vulnerable to political interference. Stressing the need for a revamp of the current short selling system, we call for a thorough revision of law and regulations. Market authorities must set out clear standards for regulatory intervention to avoid arbitrary and capricious decisions. In doing so, they can enhance transparency and accountability in law enforcement. Regulators should be aware that it is the most effective way to protect themselves from undue political influences and to restore regulatory trust.

Against the backdrop of China's introduction of the margin trading system in 2010, this paper delves into the impact of short-selling mechanisms on corporate audit fees and their underlying mechanisms. Utilising annual data from non-financial listed companies in China's A-share market between 2007 and 2022, empirical analysis is conducted using a two-way fixed-effects panel model. Findings reveal that the implementation of short-selling mechanisms significantly reduces corporate audit fees, a conclusion that remains robust after controlling for year and industry fixed effects. The research indicates that short-selling mechanisms may lower auditors' audit risks and operational costs by enhancing corporate governance standards, improving disclosure transparency, and refining the market information environment, thereby leading to decreased audit fees. This study challenges the prevailing expectation that short selling increases audit costs, offering a fresh perspective on understanding the economic consequences of short-selling mechanisms. It provides insights for regulators to refine short-selling systems, listed companies to optimise governance practices, and the auditing industry to assess risk pricing.

ABSTRACT This study examines how institutional shareholder exit threats affect bond pricing in Chinese listed firms. We find that stronger exit threats significantly reduce bond credit spreads, confirming the governance mechanism of ‘voting with the feet’. Mechanism analysis indicates that exit threats mitigate managerial myopia and lower default risk. Heterogeneity tests reveal stronger effects with greater wealth sensitivity, active short selling, and heightened media scrutiny. This study demonstrates exit threats as external governance in bond markets, with implications for risk pricing, regulatory reforms, and market efficiency in emerging economies.

ABSTRACT In this paper, we take a sample of 567 stocks listed in 2019– 2023 on the STAR Market, and explore the influencing factors of short selling behavior and its correlation with stock returns. Findings reveal that first-day short selling volume is significantly and negatively related to short-term stock performance, particularly in family firms and those with CEO duality. On the first-day of listing, short sellers tend to short stocks with higher proportion of shares outstanding and higher oversubscription ratio (especially the online oversubscription ratio). After a series of robustness tests, the conclusions still hold.

Audit partner rotation-back and short sellers' front running: Evidence from the Chinese stock market

Fairness and the SEC's Competing Regulatory Paradigms

What Do Leveraged Traders Seek and Gain from Social Media Tone? 

<div> <div> <div> <p><span>Evidence of an AI Bubble from Risk-Neutral Densities </span></p> </div> </div> </div>

Augmentation Versus Substitution: Asymmetric Effects of Generative AI on Firm Performance and Share Prices