Short Selling by Individual Investors: Destabilizing or Price Discovering?

Posted: 8 Apr 2013

See all articles by Chan Shik Jung

Chan Shik Jung

Dong-A University Business School; Korea University

Woojin Kim

Seoul National University - Business School

Dong Wook Lee

Korea University

Date Written: January 1, 2013

Abstract

This paper examines how individual investors’ participation in short sale affects the efficiency of stock pricing using a unique regulatory change in Korea. The change enables individual investors to sell short some -- but not all -- domestic stocks, without affecting the short-selling ability of institutions. We find no evidence that individuals’ participation in short sale destabilizes stock market. Specifically, our difference-in-difference estimates indicate that stocks show little change in their return volatility or skewness after they become shortable by individuals. Moreover, we find that stocks are traded within a narrower bid-ask spread and deviate less from the random-walk process after becoming shortable by individuals. Overall, our results suggest that at least some individual investors are privy to private information and they contribute to more efficient pricing via their short sales.

Keywords: Short sale, Individual investors, Korean stock market, Pricing efficiency, Destabilizing

JEL Classification: G10, G14, G20

Suggested Citation

Jung, Chan Shik and Kim, Woojin and Lee, Dong Wook, Short Selling by Individual Investors: Destabilizing or Price Discovering? (January 1, 2013). Pacific-Basin Finance Journal, Vol. 21, No. 1, 2013. Available at SSRN: https://ssrn.com/abstract=2246556

Chan Shik Jung

Dong-A University Business School ( email )

2-Ga Bumin-Dong
Busan
Korea, Republic of (South Korea)

Korea University ( email )

1 Anam-dong 5 ka
Seoul, 136-701
Korea, Republic of (South Korea)

Woojin Kim

Seoul National University - Business School ( email )

1 Gwanak-ro, Gwanak-gu
Seoul, 08826
Korea, Republic of (South Korea)
82-2-880-5831 (Phone)

HOME PAGE: http://cba.snu.ac.kr/en/faculty?mode=view&memberidx=60582&major=6

Dong Wook Lee (Contact Author)

Korea University ( email )

1 Anam-dong 5 ka
Seoul, 136-701
Korea, Republic of (South Korea)
+82.2.3290.2820 (Phone)
+82.2.3290.1307 (Fax)

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