Short selling, margin trading, and the incorporation of new information into prices

Jun Chen, Palani-Rajan Kadapakkam and Ting Yang

International Review of Financial Analysis, 2016, vol. 44, issue C, 1-17

Abstract: Utilizing daily data on Chinese stocks' short selling and margin trading activities and intraday stock trade and quote data, we find a positive association between the degree of information efficiency of stock prices and the intensity of short selling and margin trading. Short selling (margin buying) escalates during the 5days immediately before significant negative (positive) information events, which suggests short sellers (margin buyers) anticipate forthcoming news. Using the adverse selection component of the bid–ask spread as a proxy, we find that short selling and margin trading are associated with an improved information environment. Taken together, our empirical evidence supports the conjecture that short selling and margin trading in the Chinese market help stock prices incorporate new information more efficiently. Utilizing the unique Chinese regulation, we also examine the role of brokerages authorized for such trading and document a non-linear relation between pricing efficiency and the number of authorized brokerages.

Keywords: Short selling; Margin trading; Price efficiency; Corporate news; Authorized brokerages (search for similar items in EconPapers)
JEL-codes: G12 G14 G18 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (26)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:44:y:2016:i:c:p:1-17

DOI: 10.1016/j.irfa.2016.01.002

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