Short sales and price discovery of Chinese cross-listed firms
Abstract
Purpose
The purpose of this paper is to investigate the impact of short selling and margin trading on the price discovery and price informativeness of cross-listed firms, using a sample of Chinese firms listed on the China and Hong Kong stock exchanges.
Design/methodology/approach
The sample consists of 67 Chinese cross-listed firms on A-share and H-share markets out of which 18 firms are allowed to be sold short/ traded on margin since March 2010. Using pre- and post-event period, the authors compare and contrast various market microstructure variables. The contributions of the home (A-share) and overseas (H-share) markets to the incorporation of new information into prices are calculated following the permanent-transitory approach of Gonzalo and Granger (1995) as well as the adverse selection component of Lin et al. (1995).
Findings
The findings indicate that for the group of Chinese cross-listed firms that are not allowed to be sold short or bought on margin, the home (A-share) market contributes more to the price discovery process over time. However, for the group of cross-listed firms that are eligible for short selling and margin trading, the authors observe no significant difference in the contribution of either A- or H-share markets to the price discovery. The contribution of home market for these firms is even lower around the announcement of major events. The authors further find that while the short sale activities appears to be informative, measured by the adverse selection (AS) component of spread, on the whole they have not led the A-share markets to be more informative.
Research limitations/implications
The sample of cross-listed Chinese firms that are allowed to be sold short or bought on margin are rather limited. Hence, the results should be read with some caution.
Practical implications
The removal of short selling constraints appears to improve the contribution of the respective markets to the process price discovery, in the case for larger cross-listed firms.
Originality/value
The authors shed new lights on how the introduction of short selling and margin trading impacts on the price discovery of the Chinese cross-listed firms. A further contribution of the study is the use of high frequency data, while most of the previous studies on the Chinese markets use daily data.
Keywords
Acknowledgements
JEL Classification — G14, C58
The authors are thankful for the comments by an anonymous referee and the editor of the Journal. They also would like to acknowledge the financial support from National Natural Science Foundation of China (NSFC) under projects 71173023 and 71473235.
Citation
Chen, J., Tourani-Rad, A. and Yi, R. (2016), "Short sales and price discovery of Chinese cross-listed firms", International Journal of Managerial Finance, Vol. 12 No. 4, pp. 408-421. https://doi.org/10.1108/IJMF-02-2015-0025
Publisher
:Emerald Group Publishing Limited
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