Short-selling Activity and Return Predictability: Evidence from the Chinese Stock Market

Lanlan Liu, Dan Luo and Ningru Zhao

Emerging Markets Finance and Trade, 2020, vol. 56, issue 14, 3445-3467

Abstract: We examine the informativeness of short selling in the Chinese stock market based on monthly and daily short-interest data from January 2011 to July 2018. We find that short selling negatively predicts future stock returns in China. The pattern is robust when controlling for firm size, book-to-market ratio, and liquidity. A long-short strategy using a short-interest ratio (SIR)—shares shorted to shares outstanding—generates a 0.865% monthly return. We also document that return predictability is stronger when short selling is restricted. Meanwhile, we examine the information content of short-selling activity, and we confirm that the significant negative relationship between preannouncement short activity and post-announcement period returns.

Date: 2020
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DOI: 10.1080/1540496X.2019.1694895

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