Short-selling Restrictions Research Articles

Volume and stock returns in the Chinese market

We propose and empirically investigate hypotheses regarding the volume-return relationship in the Chinese stock market, taking into account the impact of prevalent noise trading and short-selling restrictions. Our findings reveal a negative correlation between trading volume and returns specifically among overvalued stocks. However, no significant correlation is observed for undervalued stocks, nor is there a consistent volume amplification effect. In contrast to our findings, Han, Huang, Huang, and Zhou (2021) also reported a positive correlation between expected return and trading volume for undervalued stocks, and they highlighted the amplified impact of trading volume in the US market. Furthermore, we observe that stricter short-selling restrictions in the Chinese market for overvalued stocks result in a larger deviation from fundamental value as the trading volume increases accompanied by greater disagreement among noise investors. These findings suggest that comprehending market disparities necessitates considering noise trading and short-selling restrictions as crucial factors.

An Analysis of Short Selling Restrictions in Factor Model Based Portfolio Immunization

An Analysis of Short Selling Restrictions in Factor Model Based Portfolio Immunization

Deregulation of short-selling and green innovation of enterprises: quasi-natural experiment of margin trading policy

PurposeThe reform and opening-up of capital market is valued for promoting sustainable development, while its impact presented as the form of deregulation of short-selling on the green innovation of enterprises in developing countries remains unclear. The purpose of this study is to outline the significance of gradual reform of financial markets in developing countries for low-carbon transformation and provide implications for achieving carbon peaking and carbon neutrality goals.Design/methodology/approachBased on the green subdivided patent data and financial data of China’s A-share listed companies, this paper takes the implementation of securities margin trading program as a quasi-natural experiment and applies the difference-in-differences (DID) model to examine the impact of deregulation of short-selling constraints on the enterprises’ green transformation.FindingsThe findings reveal that the initiating securities margin trading program significantly enhances the green innovation performance of enterprises. These findings are valid after performing a series of robustness tests such as the parallel trend test, the placebo test and the methods to exclude other policy interference. Mechanism analyses demonstrate a two-faceted effect of the securities margin trading program on the green innovation of enterprises, in which short-selling policy increases the pressure on capital market deregulation and meanwhile induces the environmental protection investment. The heterogeneity results demonstrate that the impulsive effect imposed by securities margin trading program is more significant in experimental group samples with characteristics of lower financing constraints, belonging to heavy polluting industries and possessing better environmental supervision capability.Originality/valueFirst, previous studies have focused on the impact of financial policies implemented by banking institutions on the green innovation of enterprises, but few literatures have explored the validity of relaxing short-selling restrictions or opening the capital market in the field of enterprise’s green transformation in developing country. From the view of securities market reform, this paper broadens the incentive and supervision effects of the relaxation of short-selling control on enterprise’s green innovation performance after the implementation of securities financing and securities lending policy in China’s capital market. Second, previous studies have explored the impact of command-and-control environmental regulations, as well as market-incentivized environmental regulations such as green finance, low-carbon pilots and environmental tax reform, on the green transition of enterprises. Recently the role of the securities market in the green development of enterprises has received more attention in academia. The pilot of margin financing and securities lending is essentially a market-incentivized regulatory tool, but there is few in-depth research on how it affects the green innovation of enterprises. This paper enriches the research on whether the market incentive financial regulation policy can contribute to the green transformation of enterprises under the Porter hypothesis. Third, some previous studies used the ordinary panel regression model to explore the impact of financial policy on enterprise’s innovation performance. However, due to the potential endogenous problems of the estimated model, it might get biased conclusions. Therefore, based on the method of quasi-natural experiment, this paper selects the margin trading pilot policy as an exogenous shock to solve the endogenous or reverse causality problem in traditional measurement model and applies the DID model to study the relationship between core indicator variables.

The short-selling restriction and the post-crisis financial futures market in China

The short-selling restriction and the post-crisis financial futures market in China

The short-selling restriction and the post-crisis financial futures market in China

The short-selling restriction and the post-crisis financial futures market in China

Relaxation of Short-Selling Constraints and Innovation Investments of Energy Industry in China

The purpose of this research is to determine the effect of short-selling restrictions on the corporate innovation investments of China's publicly traded energy businesses. According to external governance theory, it is predicted that the deregulation of short selling serves as a monitoring role for energy businesses' innovation investments, which are particularly vulnerable to energy efficiency issues. Between 2010 and 2018, a multiple linear regression is undertaken on a panel data set of Chinese 64-listed energy companies. According to descriptive data, the average innovation investment of Chinese energy businesses is 2.24%, indicating a low level of innovation in the energy sector. The regression findings demonstrate that easing short-selling limitations may benefit energy businesses' innovative activity. The outcomes of this study indicate that financial officials should explore further loosening short-selling restrictions, which might benefit sectors of the energy business that are highly dependent on technological innovation practices and performance.

Is it really paid for sustainable development? The economic significance of firms' green practice

AbstractFirm's green practices and sustainable development strategies are considered to have controversial impacts on its economic performance. Exploring the precise relationship between them can provide a theoretical dimension to the long‐term development of firms and the achievement of national sustainable development goals (SDGs). In this study, the authors apply the recently developed methods to test the economic significance of Chinese firms' sustainable strategies. Specifically, the authors first adopted the ESG score constructed for corporate environmental sustainability management (ESGEnv) as a proxy variable for corporate sustainability strategies and the firms' stock returns as a proxy for corporate economic effects to investigate the economic significance of firms' strategies for sustainable development. The study then confirmed that there has a positive relationship between ESGEnv and the future stock return of firms in general. Finally, the study concluded that ESGEnv can be explained by stochastic volatility, jump risk, short selling restrictions, and arbitrage risk. Furthermore, the robustness tests based on subsample and scenario grouping analysis confirmed the inconsistency in the relationship between the economic returns for the firms and the firms' green practices based their sustainable development strategies. As a result, the study contributed the literatures by clarifying the circumstances in which the firms' sustainable development strategies do have positive impacts on their economic benefits and also by providing the academy even more fuel to the already fierce debates over the firms' economic significances because of their green practices

Short selling and corporate diversification in emerging markets: Insights from controlling shareholder tunneling

Employing the staggered removal of short selling restrictions as a series of quasi-exogenous shocks and using a difference-in-differences (DiD) research design, we examine the causal effect of short selling on corporate diversification in the context of China. We find that short selling has a negative effect on firms' diversification. The channel tests reveal that short selling disciplines controlling shareholders' tunneling and consequently reduces firms' diversification. Further analyses shows that the negative effect is more pronounced for non-SOEs, for firms with lower institutional holdings and during times of industry distress. Finally, we also rule out alternative explanations that may drive our main findings. Our study provides new insights into how short selling shapes corporate diversification in emerging markets.

Short-selling restrictions and financial stability in Europe: Evidence from the Covid-19 crisis

In March 2020, six European countries imposed temporary short-selling bans to prevent further stock price declines, to reduce volatility, and to ensure financial stability during the Covid-19 pandemic, whereas other countries abstained from implementing these restrictions. We examine the effects of these regulatory interventions on stock returns and market quality for major European countries with and without bans. Our results reveal that restricting short selling did not stabilize stock prices but adversely affected market liquidity, as reflected in wider bid-ask spreads and lower turnover. In addition, smaller stock markets and smaller firms suffered more from the deterioration in market quality. Using logit regressions, we investigate the determinants for the probability that a country would impose short-selling restrictions. The results suggest that countries with weaker economies, lower fiscal capacity, less financial development, and stricter lockdown measures were more likely to adopt a ban. Overall, short-selling bans during the Covid-19 crisis negatively affected market quality and consequently regulators in general should abstain from implementing such restrictions in the future.

Market Quality and Short-Selling Ban during the COVID-19 Pandemic: A High-Frequency Data Approach

The recent emergence of COVID-19 and the subsequent short-selling restriction (SSR) imposed on some equity markets provide us with a unique framework to analyze the effects of this kind of measure on market quality in the context of increasingly automated equity markets. We contribute to the literature by analyzing the microstructure and quality parameters of the Spanish equity market during COVID-19 and SSR. We study four subperiods, namely pre-crisis, turmoil, SSR, and first de-escalation periods, by means of a tick-by-tick dataset and the complete limit order book (LOB). We observe the following impact of the SSR on the constituents of IBEX 35: (1) the SSR did comply partially with its aim at an intraday level regarding volatility, but liquidity was reduced; (2) liquidity deterioration affected more the sell than the buy side of the LOB; (3) high-frequency activity (HFT) diminished during SSR, reinforcing volatility; (4) negative effects on liquidity and HFT diminished and disappeared as the ban was lifted; (5) HFT unidirectionally Granger causes 1 min realized volatility while the natural logarithm of the slope of the LOB bidirectionally Granger causes 1 min realized volatility.

Deregulation of Short Selling and Equity Financing Costs —A Quasi-natural Experiment Based on Margin Trading

The high cost of financing is one of the reasons that restrict the development of the real economy. The soundness and development of the capital market can help reduce the cost of corporate financing. Based on the quasi-natural experiment of the margin financing and short selling system, this paper takes A-share listed companies in Shanghai and Shenzhen stock exchanges from 2010 to 2020 as research samples, and uses a difference in difference model to study the impact and internal mechanism of relaxation of short selling on the cost of equity financing of enterprises. The research indicates that the reduction of short-selling control is significantly negatively related to the company's equity financing cost, and the relaxation of short selling can reduce the cost of equity financing by improving the company's transparency. Further research indicates that the relaxation of short selling restrictions has a more significant effect on reducing the cost of equity financing in private companies and companies with a high level of analyst coverage. This paper enriches the literature in related fields such as margin trading and short selling, equity financing cost, and also provides some theoretical references for government department to strengthen the supervision of financial markets and promote financial system reform.

Linear beta pricing with efficient/inefficient benchmarks and short-selling restrictions

We provide two security pricing models that can be used when short sales of risky securities are not permitted. The first model uses a benchmark located on the expected return-standard deviation efficient frontier without short sales and presents security expected returns as a weighted linear function of two betas, one induced by the benchmark and the other adjusting for the short-sale constraints. The second model uses a benchmark that is inefficient relative to the efficient frontier, does not allow short sales, and expresses security returns as a weighted linear function of three betas:one induced by the inefficient benchmark, and the other two adjusting simultaneously for the short-sales restrictions and the benchmark's inefficiency.These results complement the linear pricing models that link expected returns and betas by allowing, for efficient or inefficient expected return-standard deviation, benchmarks with restricted short sales.

Lottery preferences and retail short selling

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.

Analyst Forecast Bias, Investors’ Heterogeneous Beliefs and Stock Price Crash Risk

The existing literature has confirmed that analyst bias can exacerbate stock price crash risk, but it is not clear how analyst bias affects stock price crash risk. Considering the impact of information asymmetry and investors’ own differences, this paper argues that the increase of analyst forecast bias will improve investors’ heterogeneous beliefs; under the condition of short selling restriction, the improvement of investors’ heterogeneous beliefs will boost stock price to a higher level, thus exacerbating stock price crash risk. Therefore, the impact of analyst forecast bias on stock price crash risk is likely to be mediated by investors’ heterogeneous beliefs. To test this theoretical prediction, this paper selects China’s A-share listed companies from 2008 to 2019 as research samples, constructs a mediating effect model, and makes an empirical analysis to study the role of investors’ heterogeneous beliefs in the impact of analyst forecast bias on stock price crash risk. The results show that:（1）Analyst forecast bias has a positive impact on investors’ heterogeneous beliefs. The larger the analyst forecast bias in the previous period, the greater the investors’ heterogeneous beliefs in the current period.（2）Investors’ heterogeneous beliefs can significantly enhance stock price crash risk. The increase of investors’ heterogeneous beliefs will exacerbate stock price crash risk.（3）Analyst forecast bias will improve investors’ heterogeneous beliefs, and then exacerbate stock price crash risk. Investors’ heterogeneous beliefs play a partial mediating role in the impact of analyst forecast bias on stock price crash risk. This conclusion basically validates the above theoretical analysis.The contributions of this paper mainly include two aspects: First, it constructs a complete impact path and transmission mechanism. Although many scholars have studied the relationship between analyst bias and stock price crash risk, they have not further analyzed the detailed mechanism. They often put the investor behavior outside the research framework. In this paper, analysts, investors and stock prices of listed companies are included in the research framework at the same time. The impact path starts with analyst forecast bias, mediates investors’ heterogeneous beliefs, and ends with stock price crash risk. Second, it covers a number of market participants, and the research conclusion has important practical significance. Listed companies should strive to improve information transparency, decrease analyst bias, so as to reduce investors’ heterogeneous beliefs. It is one of the effective ways to avoid the stock price crash. At the same time, it also has important reference significance for securities industry practitioners, investors, regulatory authorities and the government to effectively realize and prevent stock price crash risk.

How do firms attract the attention of individual investors? Shareholder perks and financial visibility

Shareholder perks are packages of benefits offered to shareholders who own a threshold number of firm shares. We test and confirm the hypothesis that shareholder perks programs in Japan provide mechanisms to increase firm visibility for individual investors through stock-price run-ups and increased trading volume just before the ex-perks date. First, firms having perks programs experience a significant price run-up toward the ex-perks date. Second, the observed price run-ups are significantly higher for stocks having tighter short-selling restrictions. Third, trading volumes and balances of short interests rise significantly just before the ex-perks date. The latter suggests active cross trades, wherein investors hedge price risk. Fourth, the results from the multivariate regression are also consistent with the hypothesis.

The role of hedge funds in the asset pricing: evidence from China

We document that hedge funds nurture mispricing in the Chinese financial market. We examine the relationship between hedge fund holdings and the degree of mispricing, assuming that hedge funds’ stock holdings are mainly for arbitrage and not for hedging. We also examine this relationship with and without short-selling restrictions. Hedge funds intentionally hold overvalued stocks. Their trades, which generate an abnormal return of 1.78% per month, also impede the dissipation of stock mispricing. Furthermore, we find that trend-chasing may explain why hedge funds prefer to hold overvalued stocks. This research provides a new perspectives on the information content and potential investment value of hedge fund holdings in emerging markets.

Is it worth to hold bitcoin?

This study examines if holding Bitcoin provides any benefit other than potential price appreciation. An estimation using the convenience yield term in the Cost-of-Carry model shows that the Bitcoin spot contract has a 5.4% premium compared to the futures contract, indicating a holding benefit. Short-selling restrictions in Bitcoin spot markets and voting rights are the sources of the premium. The short-selling restrictions make spot prices be downward sticky. The value of voting rights becomes more observable whenever a ballot is likely. When an important proposal is made to the Bitcoin network, the holding benefit increases by an additional 5.6%.

Why do banks react differently to short-selling bans? Evidence from the Asia-Pacific area and the United States

The use of short-selling bans in different countries has greatly caught the attention of policy modelling. Our study is among the first studies to try to explain the phenomenon of different bank price reactions in terms of country and stock market conditions, looking at both the stock price reaction and risk. Overall, our findings suggest that the impacts of these bans on overall market efficiency were heterogeneous and, in most cases, modest for the countries analysed. Indeed, either we do not observe any improvements or the improvements are only short-lived. For the first time, we document that banks react differently to ban restrictions mostly because of differences in terms of their fundamental factors (balance sheet indicators). Given that Us and Asia-Pacific banks react differently to a ban on short selling depending on the particular financial structure of each market, when taking these actions, policy makers should consider which firm characteristics are most important and should pay attention to whether these interventions are effective in the market. Moreover, short-selling restrictions did not contribute to containing the volatility of the financial stocks subjected to the bans; on the contrary, our results indicate that negative volatility increased in some countries.

From COVID-19 herd immunity to investor herding in international stock markets: The role of government and regulatory restrictions

We study if government response to the novel coronavirus COVID-19 pandemic can mitigate investor herding behaviour in international stock markets. Our empirical analysis is informed by daily stock market data from 72 countries from both developed and emerging economies in the first quarter of 2020. The government response to the COVID-19 outbreak is measured by means of the Oxford COVID-19 Government Response Tracker, where higher scores are associated with greater stringency. Three main findings are in order. First, results show evidence of investor herding in international stock markets. Second, we document that the Oxford Government Response Stringency Index mitigates investor herding behaviour, by way of reducing multidimensional uncertainty. Third, short-selling restrictions, temporarily imposed by the national and supranational regulatory authorities of the European Union, appear to exert a mitigating effect on herding. Finally, our results are robust to a range of model specifications.

From COVID-19 herd immunity to investor herding in international stock markets: The role of government and regulatory restrictions

We study if government response to the novel coronavirus COVID-19 pandemic can mitigate investor herding behaviour in international stock markets. Our empirical analysis is informed by daily stock market data from 72 countries from both developed and emerging economies in the first quarter of 2020. The government response to the COVID-19 outbreak is measured by means of the Oxford COVID-19 Government Response Tracker, where higher scores are associated with greater stringency. Three main findings are in order. First, results show evidence of investor herding in international stock markets. Second, we document that the Oxford Government Response Stringency Index mitigates investor herding behaviour, by way of reducing multidimensional uncertainty. Third, short-selling restrictions, temporarily imposed by the national and supranational regulatory authorities of the European Union, appear to exert a mitigating effect on herding. Finally, our results are robust to a range of model specifications.