Do Short Sales Reduce Post-Shock Anomalies in Stock Prices? Evidence from the Chinese Stock Market

Haojun Chen ()
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Haojun Chen: International School, Guangzhou Huali College, Guangzhou 511325, China

IJFS, 2025, vol. 13, issue 1, 1-24

Abstract: This study investigates the role of short sales in mitigating post-shock anomalies in stock returns within the context of China’s evolving short-sales regulations. Utilizing a unique dataset of daily short-sale volumes, this research examines how short sellers influence stock price behavior following significant price shocks. The findings reveal that short sellers act as informed arbitragers, reducing post-shock anomalies, particularly in news-driven events, and supporting Diamond and Verrecchia’s hypothesis that short-sale constraints slow price adjustments to information. This study fills a critical gap in the literature, offering insights into price efficiency and implications for regulators and investors. By highlighting the unintended consequences of restrictive short-sale policies, this paper recommends reforms to reduce borrowing costs, enhance lending programs, and promote effective short-selling practices. These results contribute to the broader understanding of market dynamics, particularly in emerging markets with tight short-sale restrictions like China.

Keywords: price shocks; short sales; predictability of stock returns; short restriction; price efficiency (search for similar items in EconPapers)
JEL-codes: F2 F3 F41 F42 G1 G2 G3 (search for similar items in EconPapers)
Date: 2025
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