Short-selling and mutual fund herding: The Chinese evidence

Lixuan Feng and Cheng Xiang

Finance Research Letters, 2023, vol. 52, issue C

Abstract: Using short-selling pilot programs in China as quasi-natural experiments, we investigate how short-selling impacts mutual fund herding. We find that mutual funds herd more on firms eligible for short-selling than those not. The effect is larger for firms with fewer media coverage, higher financial reporting opacity, or lower audit quality. Channel tests show that short-selling decreases information asymmetry proxied by informed trading and stock illiquidity. Additionally, short-selling strengthens the price impact of herding without causing reversals. Our findings fit the correlated signal theory: mutual funds receive more similar information on firms eligible for short-selling and, thus, herd more on them.

Keywords: Short-selling; Mutual fund herding; Correlated signal theory; Information asymmetry (search for similar items in EconPapers)
JEL-codes: G11 G14 G18 G20 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:52:y:2023:i:c:s1544612322006936

DOI: 10.1016/j.frl.2022.103517

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