Short-sale prohibitions, firm characteristics and stock returns: evidence from Chinese market
China Finance Review International
ISSN: 2044-1398
Article publication date: 22 September 2017
Issue publication date: 11 October 2017
Abstract
Purpose
The purpose of this paper is to empirically analyze the impacts of short prohibitions on stock prices.
Design/methodology/approach
The authors adopt event study in this paper. First, the authors match each shortable stocks with one unshortable stocks by the propensity score matching method. Second, the authors check the performance difference between treatment group and control group after the event date. Third, the authors check the performance difference among sub-groups sorted by other factors associated with stock returns.
Findings
The authors find that stocks do not decline necessarily after removal of short prohibitions; only those heavily overpriced stocks, such as small stocks, lower B/M or P/E stocks and higher turnover stocks, decline significantly.
Research limitations/implications
The media falsely stated that short selling lead to market crash; otherwise, short selling is beneficial for improving market efficiency as it is helpful for keeping overpriced stocks in line with the fundamental value.
Originality/value
This is the first paper showing that removal of short prohibitions only impacts heavily overpriced stocks significantly, which is valuable for policy making.
Keywords
Acknowledgements
This paper is financially supported by National Natural Science Foundation of China (No. 71320107002). The authors thank Professor Chongfeng Wu for his advice and guidance; the authors also thank the three anonymous referees for their helpful suggestions that greatly improved the paper. All remain errors are authors’ own.
Citation
Li, R., Li, J. and Yuan, J. (2017), "Short-sale prohibitions, firm characteristics and stock returns: evidence from Chinese market", China Finance Review International, Vol. 7 No. 4, pp. 407-428. https://doi.org/10.1108/CFRI-11-2016-0122
Publisher
:Emerald Publishing Limited
Copyright © 2017, Emerald Publishing Limited