Information advantage, short sales, and stock returns: Evidence from short selling reform in China

Xunan Feng and Kam C. Chan

Economic Modelling, 2016, vol. 59, issue C, 131-142

Abstract: We study short selling around earnings announcements and examine the potential sources of their information. Using unique daily aggregate short selling transactions in China, we find that short sellers significantly increase (decrease) their short positions before negative (positive) earnings surprise. In addition, abnormal high short selling is significantly associated with negative post-earnings announcement stock returns. The findings suggest that short sellers, on average, are informed and sophisticated traders and they can exploit profitable opportunities contained in earnings announcements. Finally, we find that stocks with poor governance or more insiders have higher (lower) abnormal short selling in negative (positive) earnings surprise, indicating private information leakage from firms with weak governance; which is consistent with the tipping argument. Our findings have important policy implications for capital market regulation in China.

Keywords: short sales; information leakage; earnings announcement; China (search for similar items in EconPapers)
JEL-codes: G11 G14 G18 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (14)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:59:y:2016:i:c:p:131-142

DOI: 10.1016/j.econmod.2016.07.007

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