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Article
Publication date: 31 May 2015

Yeongseop Rhee and Sang Buhm Hahn

This paper examines short-selling activity focusing on its behavior during non-normal times of occasional excesses in the Korean stock market. Using the methodology…

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Abstract

This paper examines short-selling activity focusing on its behavior during non-normal times of occasional excesses in the Korean stock market. Using the methodology explained by Brunnermeier and Pederson (2005) and Shkilko et al. (2009; 2012), we first examine whether short-selling is predatory on those event days of large price reversals. Overall there is little predatory abnormal short-selling in the pre-rebound phase and we can observe active contrarian short-selling in the post-rebound phase. When we compared aggressiveness between short-selling and non-short-selling using order imbalance variables, we found that non-short selling is much more aggressive than short selling in the Korean stock market. From the observation of market liquidity measured by quoted spreads, we could find that market liquidity is somewhat limited during price decline stages while it slightly improves during price reversal phases. Also, using dynamic panel model, we test the influences of those variables on stock price changes and disaggregate the compound effect of short-selling reflected in trading volume itself into differentiated ones not only through pure trading channel but also through other complicated channels such as market sentiment change. Main findings from the regression results are as follows : In the Korean stock market, short sellers seem to behave as a contrarian trader rather than a momentum trader; seller-initiated aggressive trading, whether it is by short-selling or non-short-selling, leads to negative order imbalance and price decline; market liquidity is limited by short-selling and further pressure on price decline is added in the pre-rebound stage; and stock prices are affected not only through pure selling (buying) channel but also through other channels in the Korean stock market.

Details

Journal of Derivatives and Quantitative Studies, vol. 23 no. 2
Type: Research Article
ISSN: 2713-6647

Keywords

Article
Publication date: 31 July 2009

Carlos A. Ulibarri, Ionut Florescu and Joel M. Eidsath

The purpose of this paper is to examine the efficacy of recent policy initiatives taken by the US Securities and Exchange Commission banning naked “shortselling” of…

Abstract

Purpose

The purpose of this paper is to examine the efficacy of recent policy initiatives taken by the US Securities and Exchange Commission banning naked “shortselling” of specific financial stocks. The paper also considers the merits of reinstating “uptick rule” 10a‐1, which prohibits shortselling securities on a downtick.

Design/methodology/approach

The paper studies theoretical implications of shortselling in a simple state‐claim model, reflecting varying amounts of short interest in a representative firm and noise trading in the market. Price discovery depends on the proportion of noise trading compared to rational shortselling. The empirical analysis focuses on price volatility under shortselling constraints employing simple regressions, EGARCH analysis and simulated price behavior under a hypothetical uptick rule.

Findings

The EGARCH results suggest shortselling constraints had non‐uniform impacts on the persistence and leverage effects associated with price volatility. The corresponding price simulations indicate a hypothetical uptick rule might have helped stabilize price behavior in some cases, depending on the nature of the stochastic process and whether or not quantity constraints on shortselling are binding.

Originality/value

The theoretical arguments and empirical findings suggest a “focused approach” to market regulation would be a more efficient means of discouraging trend chasing without compromising “informed trading” – that is to say, safeguarding price discovery and market liquidity without impeding arbitrage or confounding probability beliefs regarding firm survival. These conclusions are largely in accord with recent policy analysis and proposals outlined in Avgouleas.

Details

Journal of Financial Economic Policy, vol. 1 no. 3
Type: Research Article
ISSN: 1757-6385

Keywords

Article
Publication date: 21 September 2012

K. Stephen Haggard, (Grace) Qing Hao and Ying Jenny Zhang

The purpose of this paper is to investigate shortselling around private investment in public equity (PIPE) issuances, for evidence of manipulative shortselling by hedge funds.

Abstract

Purpose

The purpose of this paper is to investigate shortselling around private investment in public equity (PIPE) issuances, for evidence of manipulative shortselling by hedge funds.

Design/methodology/approach

The authors use the Regulation SHO shortselling data in combination with information about hedge fund participation in traditional stock PIPE offerings from Sagient Research, and share price and trading volume data from the Center for Research in Security Prices (CRSP) to examine the relations among hedge fund participation, shortselling levels and stock returns surrounding such offerings.

Findings

It is found that significantly less pre‐deal shortselling occurs when hedge funds are included in the PIPE investor group, and adjusted returns for firms with hedge funds as investors are positive in the pre‐deal period and negative in the post‐deal period. Both of these findings are opposite of the patterns expected given manipulative shortselling by hedge funds. Pre‐deal and post‐deal adjusted returns and PIPE discount are unrelated to pre‐deal shortselling by hedge funds, findings inconsistent with manipulative shortselling by these investors. The evidence suggests that most hedge funds that invest in traditional stock PIPEs do not engage in manipulative shortselling around these deals.

Originality/value

This paper is the first, to the authors' knowledge, to examine hedge fund participation and daily shortselling around traditional stock PIPE issuances. Previous studies focus on structured PIPE deals, which do not represent the majority of the PIPE market at present. The daily short selling data used in this study allow for detailed investigation of market behavior not afforded by monthly short interest data used in previous studies.

Article
Publication date: 1 August 2016

Jun Chen, Alireza Tourani-Rad and Ronghua Yi

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…

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.

Details

International Journal of Managerial Finance, vol. 12 no. 4
Type: Research Article
ISSN: 1743-9132

Keywords

Article
Publication date: 24 May 2013

Michael Devaney and William L. Weber

The purpose of this paper is to investigate the effects of the 2008 SEC shortsell moratorium on regional bank risk and return. The paper also examines the decline in…

Abstract

Purpose

The purpose of this paper is to investigate the effects of the 2008 SEC shortsell moratorium on regional bank risk and return. The paper also examines the decline in “failures to deliver” securities in the wake of SEC shortsell moratorium.

Design/methodology/approach

In total, six regional bank portfolios are derived and the beta coefficients from a CAPM model are estimated using the integrated generalized autoregressive conditional heteroskedasticity (IGARCH) method accounting for the shortsell moratorium. Data on 110 regional banks in six US regions from January 2002 to December 30, 2011 are used to estimate the model.

Findings

The ban on naked short selling and the SEC shortsell moratorium significantly increased individual bank risk for a majority of banks in six geographic regions, but also increased return in three of three regions. There was also reduced naked short selling as failures to deliver securities declined sharply after the September 2008 moratorium took effect.

Originality/value

Regional banks have generally not achieved the size needed to be deemed “too big to fail” by policy‐makers. Thus, policy changes such as the SEC shortsell moratorium might be expected to have larger effects on regional banks than on larger banks, which might be shielded from the policy change by having achieved “too big to fail” status. The authors' results are consistent with research that has shown that shortsell restrictions increase risk by reducing liquidity and trading volume.

Details

Journal of Financial Economic Policy, vol. 5 no. 2
Type: Research Article
ISSN: 1757-6385

Keywords

Article
Publication date: 8 February 2016

Azhar Mohamad

The aim of this paper is to provide a review of the literature on short selling. In particular, it seeks to describe the history of short selling and anti-shorting laws…

Abstract

Purpose

The aim of this paper is to provide a review of the literature on short selling. In particular, it seeks to describe the history of short selling and anti-shorting laws. With respect to short-selling regulation, the main emphasis will be placed on the UK FSA’s regulatory action.

Design/methodology/approach

This paper reviews the history of short selling and the development of anti-shorting laws, particularly with regard to the UK market. It also analyses the distinct literature on short selling.

Findings

The paper argues that the development of anti-shorting laws shows that regulators are instituting a policy unfavourable to short sellers. The opposers of short selling may be seen as lacking ideas and having the tendency to ban anything they do not like. Short sellers, on the other hand, may be seen as the elite bodyguards of the financial market whose job is to get rid of overvalued stocks, and ultimately keep the market safe and efficient. For this reason, short sellers deserve our praise and thanks, not our hatred and opprobrium.

Originality/value

To the authors’ knowledge, this paper is the first to review the history of short selling and the development of anti-shorting laws, particularly with regard to the UK market.

Details

Journal of Financial Regulation and Compliance, vol. 24 no. 1
Type: Research Article
ISSN: 1358-1988

Keywords

Article
Publication date: 6 March 2017

Charilaos Mertzanis

The relationship between short selling, market volatility and liquidity remains an object of intensive research. However, empirical evidence is yet to provide a conclusive…

Abstract

Purpose

The relationship between short selling, market volatility and liquidity remains an object of intensive research. However, empirical evidence is yet to provide a conclusive elucidation of this relationship by examining aspects of market fragmentation in the form of different market settings, different timing and different stocks under coverage, among others. This paper aims to contribute to the debate by investigating the impact of short selling on market volatility and liquidity in the Athens Exchange (ATHEX) under three different periods of short sales restrictions.

Design/methodology/approach

Two hypotheses are tested using econometric methodologies (co-integration and Granger-causality tools).

Findings

The empirical results indicate that when short selling is allowed, aggregate stock returns are in the short-term more volatile, but the liquidity of the market is not significantly affected. This might be the result of significant imbalances between supply and demand of stock caused by short-selling restrictions, leading to market price fluctuations.

Research limitations/implications

The analysis of empirical evidence needs further expansion and association with institutional firm-level and country-level elements to provide a more comprehensive understanding of the impact of short selling on market volatility and liquidity.

Practical implications

Stock market regulation involving short-selling restrictions have different implications according to extent and degree of stringency of the restrictions as well as the market on which they are imposed. That is especially important for the assessment of the market impact of the recent European Union regulation on short selling that has been imposed upon all EU member-States alike.

Social implications

Financial regulation policy must balance the benefits and costs for retail investors of imposing short-selling restrictions on stock market trading.

Originality/value

First-time empirical evidence is provided on the impact of short selling regulations on market volatility and liquidity of ATHEX highlighting the potential effectiveness of regulation policy.

Details

Studies in Economics and Finance, vol. 34 no. 1
Type: Research Article
ISSN: 1086-7376

Keywords

Article
Publication date: 15 September 2020

Tingli Liu, Ying Jiang and Lizhong Hao

Although short selling has been legalized in China for nearly 10 years, due to the existence of short-sale constraints, its impact on corporate governance of listed…

Abstract

Purpose

Although short selling has been legalized in China for nearly 10 years, due to the existence of short-sale constraints, its impact on corporate governance of listed companies remains unclear. This paper aims to examine the impact of short-sale refinancing on earnings quality after the short-selling constraints have been released. The authors further explore whether this impact is subject to the nature of property rights and shareholding structures.

Design/methodology/approach

This study is based on a sample of A-share firms in China for the period 2014–2016. The authors use earnings response coefficients (ERC) as a proxy for earnings quality. To empirically examine this issue, a matching sample is generated by using propensity score matching method (PSM) to reduce sample selection bias.

Findings

This study provides evidence that deregulation of short selling has positive external effect on corporate governance. The results indicate that the potential short-selling opportunities can effectively suppress earnings manipulation and improve earnings quality. However, the impact of short selling on earnings quality varies for companies with different nature of property rights and shareholding structure.

Originality/value

To the best of the authors’ knowledge, this is the first study to investigate the relationship between short selling and earnings quality in the unique setting of short-sale refinancing. This study provides new evidence on the impact of short selling at the micro level and calls for further deregulation of short selling. In addition, this study contributes to existing studies on short-sale refinancing by examining an emerging market.

Details

International Journal of Accounting & Information Management, vol. 29 no. 1
Type: Research Article
ISSN: 1834-7649

Keywords

Article
Publication date: 5 May 2015

Maysam Ahmadvand, Hadi Khajezadeh Dezfuli and Mohamad Javad Sadehvand

This paper aims to first explain short selling and its benefits and damages; then, using experts’ opinions and Technique for Order of Preference by Similarity to Ideal…

Abstract

Purpose

This paper aims to first explain short selling and its benefits and damages; then, using experts’ opinions and Technique for Order of Preference by Similarity to Ideal Solution (TOPSIS) method as well as based on the legal, financial and jurisprudential criteria adopted, evaluate and prioritize Islamic alternatives to short selling; and finally, introduce the most proper approach for implementing it in Iran’s stock market.

Design/methodology/approach

The methods applied in the paper are as follows: Library method to collect the required data for developing the theoretical and jurisprudential foundations of the study, identifying the appropriate criteria for prioritizing; the alternative methods for short selling in the Islamic markets; and the field method to determine the level of significance of the ranking criteria and prioritize the alternative methods for short selling in the Islamic markets on the basis of such criteria. The alternative methods for short selling in Iranian stock market were identified and analyzed jurisprudentially and legally. Afterwards, these strategies were prioritized based on the (legislative, financial and jurisprudential) criteria which were adopted in the form of Delphi from the related literature, research and expert opinions by means of TOPSIS approach. The method with the highest ranking will be introduced as the alternative method for short selling.

Findings

The paper suggests that among all Islamic alternatives to short selling, based on experts’ opinions and legal considerations, method of combining Murabaha and Wa’ad is the most proper strategy in Iranian stock market.

Research limitations/implications

An important limitation we faced in this study was limited familiarity of Iran, capital market participants with Islamic finance concepts including Islamic alternatives to short selling. Therefore, designed questionnaire was sent only to participants who had experience in the field of Islamic finance that they were not more than 31 people. Of course, in this study, large sample size was not necessary because the questionnaire was completed by experts, and therefore, results were scientific and reliable.

Originality/value

One of the transaction strategies which significantly contributes to the enhancement of market liquidity is short selling. However, this strategy is not applicable to the Islamic stock markets because of its contradictions with a number of Islamic laws. Therefore, Islamic financial researchers have attempted to design relevant legal mechanisms drawing on the Islamic contracts to make use of the merits of this transaction strategy. In addition to introducing short selling and its demerits for the stock market, the paper explored the alternative methods and proposed the most proper one for implementing in Iranian stock market.

Details

Qualitative Research in Financial Markets, vol. 7 no. 2
Type: Research Article
ISSN: 1755-4179

Keywords

Book part
Publication date: 15 November 2018

Savannah (Yuanyuan) Guo, Sabrina Chi and Kirsten A. Cook

This study examines short selling as one external determinant of corporate tax avoidance. Prior research suggests that short sellers have information advantages over…

Abstract

This study examines short selling as one external determinant of corporate tax avoidance. Prior research suggests that short sellers have information advantages over retail investors, and high short-interest levels are a bearish signal of targeted stock prices. As a result, when short-interest levels are high, managers have been shown to take actions to minimize the negative effect of high short interest on firms’ stock prices. Tax-avoidance activities may convey a signal of bad news (i.e., high stock price crash risk). We predict that, when short-interest levels are high, managers possess incentives to reduce firm tax avoidance in order to reduce the associated stock price crash risk. Consistent with this prediction, we find that short interest is negatively associated with subsequent tax-avoidance levels. This effect is incremental to other factors identified by prior research. We conclude that short selling significantly constrains corporate tax avoidance.

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