Short selling and firms’ long-term stock return volatility: Evidence from Chinese concept stocks in Hong Kong

Xiaoqi Yang, Gianluca Vagnani, Yan Dong and Xu Ji

Finance Research Letters, 2024, vol. 70, issue C

Abstract: This paper examines the impact of short selling on the long-term volatility of firms' stock returns, highlighting the moderating effect of corporate governance quality. We analyze a sample of Chinese concept stocks listed in Hong Kong from 2015 to 2023, separating stock volatility into short- and long-term components with a GARCH-MIDAS model and differentiating between noisy and informed short selling. We provide evidence through portfolio and regression analyses that short selling increases stock return volatility, with the most significant impact observed in the long-term component, fueled in part by noisy short selling. However, this effect can be mitigated by managers who invest in improving their firms’ corporate governance quality. Implications of our findings for both research and practical applications are discussed.

Keywords: Short selling; Long-term stock return volatility; Corporate governance; Noise trading; GARCH-MIDAS model (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:70:y:2024:i:c:s1544612324013680

DOI: 10.1016/j.frl.2024.106339

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