Informed Short Sellers and Stock Price Reactions to Earnings Announcements: Evidence from China

51 Pages Posted: 28 May 2013 Last revised: 22 Nov 2013

See all articles by Guojun Wang

Guojun Wang

Shanghai Normal University; Tongji University

Date Written: November 1, 2013


Using the special event of short selling ban removal in the Chinese stock market in March 2010, I study the relationship between short selling activities and future stock returns and the effect of short sale constraints on stock price reactions to earnings announcements. I find strong evidence supporting the Diamond and Verrecchia (1987) hypothesis that an unexpected increase in short interest predicts negative future stock returns. The long-short portfolio that buys stocks with a decline or no change in short interest and shorts stocks with an increase in short interest is able to generate a significant positive return in the following week. The positive return is strongest during the first two days, is most significant in three industries: properties, conglomerates, and industrials, is highest for big firms, growth stocks, and stocks with high short interest. Moreover, I also confirm the Diamond and Verrecchia (1987) prediction that reducing short sale constraints leads to smaller price adjustments on the private information announcement day as the stock price reaction to earnings surprises on earnings announcement day is found to be 70% lower after the short sale ban is removed. However, I don’t find evidence supporting their prediction that the reduction in price reaction is larger when negative news is released due to data limitations.

Keywords: short seller, short sale constraints, informed trading, informational efficiency

JEL Classification: G12, G14, G18

Suggested Citation

Wang, Guojun, Informed Short Sellers and Stock Price Reactions to Earnings Announcements: Evidence from China (November 1, 2013). Available at SSRN: or

Guojun Wang (Contact Author)

Shanghai Normal University ( email )

No.100 Guilin Road
Shanghai, 200234

Tongji University ( email )

School of Economics and Management
1239 Siping Rd

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