Short-selling Constraints Research Articles

Does Short Selling Affect Corporate Payout Policy Evidence from China

ABSTRACT Using China’s short-selling pilot program as an exogenous shock, we provide evidence that removal of short selling constraint has significantly increased firms’ dividend payout. This positive effect is more pronounced for firms with weak monitoring and firms with more information opacity, suggesting that short selling plays an important governance role in investor protection and information disclosure. This association is robust to a series of robustness checks. Furthermore, we find that firms with active short selling activities are more likely to increase the dividend payout, small firms or big firms both show significant increase in dividends after introduced into pilot list, but the effect is weaker for those engaged in repurchase shares. Overall, this study sheds light on the role of short-selling on firms’ payout policy in the emerging market.

A Multi-period Fuzzy Portfolio Optimization Model with Short Selling Constraints

A Multi-period Fuzzy Portfolio Optimization Model with Short Selling Constraints

An Application of Portfolio Mean-Variance and Semi-Variance Optimization Techniques: A Case of Fiji

In this paper, we apply the Markowitz portfolio optimization technique based on mean-variance and semi-variance as measures of risk on stocks listed on the South Pacific Stock Exchange, Fiji. We document key market characteristics and consider monthly returns data from SEP-2019 to FEB-2022 (T = 30) of 17/19 listed companies on the stock exchange to construct various portfolios like 1/N (naïve), maximum return, and market and minimum-variance with and without short-selling constraints. Additionally, we compute each stock’s beta using the market capitalization-weighted stock price index data. We note that well-diversified portfolios (market portfolio and minimum-variance portfolio) with short-selling constraints have relatively higher expected returns with lower risk. Moreover, well-diversified portfolios perform better than the naïve and maximum portfolios in terms of risk. Moreover, we find that both the mean-variance and the semi-variance measures of risk yields a unique market portfolio in terms of expected returns, although the latter has a lower standard deviation and a higher Sharpe ratio. However, for the minimum-variance portfolios and market portfolios without short selling, we find relatively higher returns and risks using the mean-variance than the semi-variance approach. The low beta of individual stock indicates the low sensitivity of its price to the movement of the market index. The study is an initial attempt to provide potential investors with some practical strategies and tools in developing a diversified portfolio. Since not all the portfolios based on mean-variance and the semi-variance analyses are unique, additional methods of investment analysis and portfolio construction are recommended. Subsequently, for investment decisions, our analysis can be complemented with additional measures of risk and an in-depth financial statement/company performance analysis.

The effect of short selling on corporate social responsibility: Evidence from a quasi‐experiment

AbstractStakeholder demands have been viewed as constraints on the organization, as well as opportunities that can benefit the firm. To distinguish between these views, we use a natural experiment to study how relaxing constraints on short selling affects corporate social responsibility (CSR). With a difference‐in‐differences design, we find that relaxing short selling constraints has a positive impact on CSR investment. Furthermore, we find that the increase in CSR varies with measures of overvaluation and financial constraints, is mainly attributable to the strategic subset of CSR rather than the social subset, and is driven by a decrease in CSR concerns. Our result is consistent with the view that CSR can benefit the firm through an insurance effect: firms increase CSR as protection from bad news becoming more readily incorporated into stock prices from greater short selling.

Optimal Time-Consistent Investment and Premium Control Strategies for Insurers with Constraint under the Heston Model

In this work, we study the optimal investment and premium control problem with the short-selling constraint under the mean-variance criterion. The claim process is assumed to follow the non-homogeneous compound Poisson process. The insurer invests the surplus in one risk-free asset and one risky asset described by the Heston model. Under these, we consider an optimization objective that maximizes the return (the expectation of terminal wealth) and minimizes the risk (the variance of terminal wealth). By constructing the extended Hamilton–Jacobi–Bellman (HJB) system with the dynamic programming method, the time-consistent strategies and the corresponding value function are obtained. Furthermore, we provide numerical examples to illustrate the effects of the model parameters on the optimal policies.

SHORT SELLING WITH MARGIN RISK AND RECALL RISK

To investigate the effect of short-selling constraints on investor behavior, we formulate an optimal stopping model in which the decision to cover a short position is affected by two short sale-specific frictions — margin risk and recall risk. Margin risk is introduced by assuming that a short seller is forced to close out their position involuntarily if they cannot fund margin calls (since short sales are collateralized transactions). Recall risk is introduced by permitting the lender to recall borrowed stock at any time, once again triggering an involuntary close-out. Examining the effect of these frictions on the optimal close-out strategy and associated value function, we finding that the optimal behavior can be qualitatively different in their presence. Moreover, these frictions lead to a substantial loss in value, relative to the first-best situation without them (a reduction of approximately 17% for our conservative base-case parameters). This significant effect has important implications for many familiar no-arbitrage identities, which are predicated on the assumption of unfettered short selling.

Solving Heterogeneous-Belief Asset Pricing Models With Short-Selling Constraints and Many Agents

Solving Heterogeneous-Belief Asset Pricing Models With Short-Selling Constraints and Many Agents

Information Absorption in Stocks with Short-Selling Constraints

Information Absorption in Stocks with Short-Selling Constraints

Short sellers and insider trading profitability: A natural experiment

We examine the impact of short sellers on insider trading profitability using a natural experiment of a pilot program which relaxed short-selling constraints for randomly selected pilot stocks. We find that pilot firms experienced a significant decrease in insider trading profitability during the pilot program. The results are more pronounced for the pilot firms with poor information quality, and for the pilot firms without corporate restrictions on insider trading. Our evidence suggests that short sellers serve an important market disciplinary role by reducing insider trading profitability.

Information Absorption in Stocks with Short-Selling Constraints

Under short-sales restrictions, we document a phenomenon where the market reacts again to publicly available adverse information, to which it has already responded before. We employ a Japanese dataset endowed with distinctive regulatory features pertaining to trading restrictions for a specific subset of stocks. Japanese SEOs also have unique regulatory aspects. Specifically, a Japanese SEO’s issue date, by regulation, is a minimum of five trading days from its pricing date. We posit that when an SEO is announced for short-sales restricted stocks, pessimistic investors are initially kept at abeyance and restricted from responding freely until the issue date, to the offering-related adverse information. The price reaction on the issue date, is to the now stale information to which the market has already reacted at its announcement. The phenomenon is attributable to a delayed reaction to publicly available information for short-sales restricted stocks, manifested only when additional shares are introduced.

Optimal portfolio allocation and asset centrality revisited

This paper revisits the relationship between eigenvector asset centrality and optimal asset allocation in a minimum variance portfolio. We show that the standard definition of eigenvector centrality is misleading when the adjacency matrix in a network can take negative values. This is, for example, the case when the network topology is induced by the correlation matrix between assets in a portfolio. To correct for this, we introduce the concept of positive and negative eigenvector centrality. Our results show that the loss function associated to the minimum variance portfolio is positively/negatively related to the positive and negative eigenvector centrality under short-selling constraints but cannot be generalized beyond that. Furthermore, in contrast to what is claimed in the related literature, this relationship does not imply any monotonic relationship between the centrality of an asset and its optimal portfolio allocation. These theoretical insights are illustrated empirically in a portfolio allocation exercise with assets from U.S. and U.K. financial markets.

International equity U.S. mutual funds and diversification benefits

This study examines whether U.S. international equity mutual funds provide out-of-sample diversification benefits in the presence of no short selling constraints. Ignoring the economic state, international mutual funds do not provide out-of-sample diversification benefits. However international mutual funds do provide out-of-sample diversification benefits in certain economic states. The benefits are concentrated when the lag one-month U.S. Treasury Bill return is lower than normal.

The Moderating Effect of Family Business Ownership on the Relationship between Short-Selling Mechanism and Firm Value for Listed Companies in China

This study demonstrates an investigation of the external corporate governance effect of short selling mechanisms on firm value in the Chinese context. The effect of family businesses is also examined as a moderator of the relationship between short-selling and firm value. Using panel data analysis of Chinese listed companies, this paper tests a total sample of 22,468 firm-year observations from the Shanghai and Shenzhen Stock Exchange from 2009 to 2019 by applying the PSM-DID method in order to mitigate self-selection and endogenous problems caused by the uniqueness of Chinese short selling mechanisms. The findings suggest that both deregulation and the propensity of short selling can improve the firm value. Our findings also established that family ownership weakens firm value with the availability of short-selling, which indicates that family businesses have long orientations and conduct better corporate governance practices than non-family business, as short-selling shows a weaker external governance effect on firm value creation by family businesses in China. A robust test of alternative measurements is conducted and validated. This study provides significant insights for policymakers to consider in order to further relax short-selling constraints, which can act as effective external governance for better firm value creation, especially for non-family businesses in developing countries.

The Macroeconomics of Financial Speculation

I review the literature on financial speculation driven by belief disagreements from a macroeconomics perspective. To highlight unifying themes, I develop a stylized macroeconomic model that embeds several mechanisms. With short-selling constraints, speculation can generate overvaluation and speculative bubbles. Leverage can substantially inflate speculative bubbles, and leverage limits depend on perceived downside risks. Shifts in beliefs about downside tail scenarios can explain the emergence and the collapse of leveraged speculative bubbles. Speculative bubbles are related to rational bubbles, but they match better the empirical evidence on the predictability of asset returns. Even without short-selling constraints, speculation induces procyclical asset valuation. When speculation affects the price of aggregate assets, it also influences macroeconomic outcomes such as aggregate consumption, investment, and output. Speculation in the boom years reduces asset prices, aggregate demand, and output in the subsequent recession. Macroprudential policies that restrict speculation in the boom can improve macroeconomic stability and social welfare.

Idiosyncratic volatility and stock price crash risk: Evidence from china

This paper investigates the relationship between idiosyncratic volatility and the risk of a stock price crash in China. Using a large sample of Chinese listed firms from 2007 to 2018, the evidence shows that stock price crash risk is significantly positively associated with idiosyncratic volatility. Moreover, firms with a higher level of idiosyncratic volatility are more likely to experience a crash in stock price. The results are robust to alternative measures of idiosyncratic volatility and stock price crash risk and the findings advance our understanding about the role of short-selling constraints in managing the risk of a stock price crash.

Short selling constraints and politically motivated negative information suppression

This study examines the effect of short selling constraints on politically motivated suppression of negative information. We use a unique setting in China, in which there are multiple exogenous changes in short selling constraints and firms have strong incentives to suppress negative information during politically sensitive periods. Results from Difference-in-Differences analyses and a regression discontinuity design show that removing short selling constraints can reduce politically motivated bad news suppression. Short selling can reduce negative information suppression through the channels of improved financial reporting quality, more voluntary disclosure from management, and more timely release of information by media. In addition, the effect of short selling on reducing bad news hoarding is more pronounced for more politically sensitive meetings and for state-owned firms located in regions with weaker market and institutional development.

Portfolio Selection Using Data Envelopment Analysis Cross-Efficiency Evaluation with Undesirable Fuzzy Inputs and Outputs

In this paper, we discuss a portfolio selection problem based on fuzzy data envelopment analysis cross-efficiency evaluation wherein both undesirable fuzzy inputs and outputs have been considered. We first propose a data envelopment analysis cross-efficiency model, in which both undesirable inputs and outputs are considered. Furthermore, considering the imprecision of the data, we extend the crisp model to the fuzzy environment and propose a fuzzy data envelopment analysis cross-efficiency model with coexisting undesirable input and output data. We then apply the proposed model to the portfolio selection problem and present a novel mean-semivariance portfolio selection model based on fuzzy data envelopment analysis cross-efficiency scores, in which several realistic constraints are considered, including a budget, cardinality, buy-in thresholds, and no short selling constraints. After that, we employ the genetic algorithm (GA) to solve the proposed model. Finally, a real-life case study is presented to demonstrate the effectiveness of the proposed approaches.

Firm-specific investor sentiment for the Chinese stock market

Investor sentiment plays a significant role in asset prices, and sieves out safer and speculative stocks, and captures institutional and retail investors’ demand shocks. Previous studies focus on the effects of investor sentiment in the developed stock markets using various sentiment metrics. We propose overnight and over-weekend returns as firm-specific investor sentiment (FSIS) to reflect retail investors’ beliefs about the developing Chinese stock market, and show that FSIS has short-term persistence, a negative relation with intraday returns and price impact, a U-shaped relation with trading activity, an inverse U-shaped relation with long-run performance and a positive impact on cross-sectional returns. FSIS captures the characteristics of the Chinese stock market with short-selling constraints, and market-level information of FSIS explains risk premiums from sentiment-driven mispricing. Our results also reflect the stronger-self remediability after the 2015 crash of the Chinese stock market.

When a Master Dies: Speculation and Asset Float

Abstract An artist’s death constitutes a negative shock to his future production; death permanently decreases the artist’s float. We use this shock to test predictions of speculative trading models with short-selling constraints. As predicted in our model, we find that an artist’s premature death leads to a permanent increase in prices and turnover; this effect being larger for more famous artists. We document that premature death increases prices (by 54.7%) and secondary market volume (by 63.2%).

The Macroeconomics of Financial Speculation

I review the literature on financial speculation driven by belief disagreements from a macroeconomics perspective. To highlight unifying themes, I develop a stylized macroeconomic model that embeds several mechanisms. With short-selling constraints, speculation can generate overvaluation and speculative bubbles. Leverage can substantially inflate speculative bubbles and leverage limits depend on perceived downside risks. Shifts in beliefs about downside tail scenarios can explain the emergence and the collapse of leveraged speculative bubbles. Speculative bubbles are related to rational bubbles, but they match better the empirical evidence on the predictability of asset returns. Even without short-selling constraints, speculation induces procyclical asset valuation. When speculation affects the price of aggregate assets, it also influences macroeconomic outcomes such as aggregate consumption, investment, and output. Speculation in the boom years reduces asset prices, aggregate demand, and output in the subsequent recession. Macroprudential policies that restrict speculation in the boom can improve macroeconomic stability and social welfare.