The Unintended Real Effects of Short Selling in an Emerging Market

46 Pages Posted: 27 Oct 2015 Last revised: 8 Dec 2018

See all articles by Xiaoran Ni

Xiaoran Ni

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE); Xiamen University - School of Economics

Sirui Yin

Miami University

Date Written: December 1, 2018

Abstract

Exploiting the staggered removal of short-sale bans in China, we document negative real effects of allowing short selling in an emerging market featured by concentrated ownership and weak investor protection. Pilot firms experience a significant drop in the stock price around the announcement of the program. We also observe a decrease in firm risk and firm performance after the removal of short-sale bans. The effect is stronger when controlling shareholders’ private benefit is large and when corporate governance is weak. In addition, firms reduce equity financing, lower debt ratio, and cut capital investments and R&D expenditures. Contrary to prior studies that find a positive effect of short selling on investment efficiency in developed markets, our findings indicate that the real effects of short selling are negative in emerging markets like China.

Keywords: Short Selling; Short-sale Ban; Corporate Risk-Taking; Controlling Shareholder; Investor Protection

JEL Classification: G34, G38, G14

Suggested Citation

Ni, Xiaoran and Yin, Sirui, The Unintended Real Effects of Short Selling in an Emerging Market (December 1, 2018). Asian Finance Association (AsianFA) 2017 Conference. Available at SSRN: https://ssrn.com/abstract=2680336 or http://dx.doi.org/10.2139/ssrn.2680336

Xiaoran Ni (Contact Author)

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

D 204, Economics Building
Xiamen, Fujian 361005
China

Xiamen University - School of Economics ( email )

China

Sirui Yin

Miami University ( email )

Oxford, OH 45056
United States

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