Margin trading,short selling,and bond yield spread

Using a quasi-natural experiment, this study examines the effects of margin trading and short selling on bond yield spread in China. It finds that both margin trading and short selling can reduce bond yield spread. Additionally, it finds that margin trading lowers firms’ debt ratios and increases their credit ratings, which explains the reduced spread. In other words, margin trading can impact investors’ decisions by revealing positive information about a firm. Another finding is that short selling lowers the bond yield spread by decreasing earnings management, suggesting that short selling has an impact on investors’ decisions through its effect on corporate governance. Our results suggest that margin trading transmits positive information and short selling impacts firms’ policies. These results provide support for future regulations of margin trading and short selling.     

Short selling,margin buying and stock return in China market

It is well argued that short sellers are informed traders, and short interests predict future stock returns significantly. However, most researches neglect margin buyers, as twin sisters of short sellers, and keep silent about their impact on stock returns. In this article, we demonstrate that margin buyers significantly impact predictive power of conventional short measures. We document that conventional short measures neglecting margin‐buying activities, short interest ratio (SIR) and days to cover (DTC) fail to predict stock return unless our analysis is confined to lightly margin bought stocks. We also show that short‐margin trading ratio (SMTR), revised short measure with consideration of margin buying, predict stock return more sharply. What is more, we can form profitable portfolios by the new short measure.     

Effect of the ban on short selling on market prices and volatility

We examine the effects of the short‐selling ban, imposed by Australian regulators in the wake of the global financial crisis, on the trading of financial stocks. Our findings argue against commonly stated reasons for imposing short‐sale bans. We find no evidence that short‐sale restrictions provide support for stock prices or that they reduce volatility. Moreover, stocks subject to the short‐selling ban suffered a severe degradation in market quality. Controlling for the adverse effects of the financial crisis on markets, we show that short‐selling restrictions increase intraday volatility, reduce trading activity and increase bid–ask spreads.     

Impact of short selling activity on market dynamics: Evidence from an emerging market

With unique daily short sale data of Borsa Istanbul (stock exchange of Turkey), we investigate the dynamic relationship between short selling activity and volatility, liquidity and market return from January 2005 to December 2012 using a VAR(p)-cDCC-FIEGARCH(1,d,1) approach. Our findings suggest that short sellers are contrarian traders and contribute to efficient stock market in Turkey. We also show that increased short selling activity is associated with higher liquidity and decreased volatility. However this relation weakens during the financial turmoil of 2008. Our results indicate that any ban on short sales may be detrimental for financial stability and market quality in Turkey.     

The determinants of short selling: evidence from the Hong Kong equity market

While most financial regulators agree that short sellers have an important role to play in ensuring an efficiently functioning market, it is interesting to note that many did not hesitate to ban short selling during the recent financial crisis. This apparent contradiction most likely stems from a lack of understanding about what motivates short trading. In this paper, we focus on the determinants of short selling during ‘normal’ trading in the Hong Kong stock market. We find that dividend payments, company fundamentals, risk, option trading, the interest rate spread and past returns and short selling are all significant determinants of short selling.     

Short trading and short investing

Short selling is measured in the literature as both constraint (e.g., lending fees) and activity (e.g., trades). We show that these two measures capture separate effects, which we characterize into two different strategies. The first strategy, “short trading,” has minimal constraints, weekly scale return predictability and average risk. The second strategy, “short investing,” has high constraints, multi-month return predictability and higher risk. Moreover, each strategy incorporates different types of information. Short trading includes short-lived information while short investing includes more long-lived, fundamental information. This diversity in short sellers has implications for both theoretical and empirical research.     

Informed trading before analyst downgrades: Evidence from short sellers

This paper studies short-selling prior to the release of analyst downgrades in a sample of 670 downgrades of Nasdaq stocks between 2000 and 2001. We find abnormal levels of short-selling in the three days before downgrades are publicly announced. Further, we show that this pre-announcement abnormal short-selling is significantly related to the subsequent share price reaction to the downgrade, and especially so for downgrades that prompt the most substantial price declines. Our findings are robust to various controls that might also affect short-selling such as pre-announcement momentum, three-day pre-announcement returns, and announcement-day share price. In addition, the results are independent of scheduled earnings announcements, analyst herding, and non-routine events near downgrades. Further evidence suggests that tipping is more consistent with the data than the prediction explanation which posits that short sellers successfully predict downgrades on the basis of public information about firms’ financial health. Finally, we present evidence that downgraded stocks with high abnormal short-selling perform poorly over the subsequent six months by comparison with those with low abnormal short-selling. Overall, our results support the hypothesis that short sellers are informed traders and exploit profitable opportunities provided by downgrade announcements.     

Short selling and stock returns: Evidence from the UK

The practice of shorting stocks was put forward as one of the causes of the recent financial crisis whereas Shiller (2003), for example, considers shorting an essential element of an efficient market. Shorting involves selling borrowed stocks and subsequently closing the position by purchasing and returning the stock to the lender. A profit will be realised if the stock's price decreases. Shorting enables investors who do not own a perceived overvalued stock to sell. Using a high-frequency UK dataset for the period between September 2003 and April 2010, our findings suggest shorting indicates evidence of overvalued stocks as significantly negative abnormal stock returns appear to follow an increase in shorting. These results do not hold, however, for shorting which occurs around the ex-dividend date. We further find that these results hold during the recent financial crisis.     

The impact of margin trading and short selling on the investment-to-price sensitivity. Evidence from China

Employing a database of seven successive short-selling and margin trading ban lifts in the Chinese stock markets during the period 2010–2020, I investigate the impact of leveraged trading transactions on the investment-to-price sensitivity. I also examine whether stock liquidity and institutional shareholdings affect the investment sensitivity subsequent to the lift of short-selling and margin trading constraints. The results from the panel data regression analysis show that lifting bans lead to less corporate investment and a decrease of the investment-to-price sensitivity between 0.29% and 0.44%. Moreover, the regression results reveal that the investment-to-price sensitivity is stronger for more liquid stocks, while the proportion of institutional shareholdings does not affect significantly the corporate investment sensitivity.     

Market liquidity and depth on two different electronic trading systems: A comparison of Bund futures trading on the APT and DTB

This paper investigates the liquidity of two different electronic trading systems – the APT system at LIFFE and the DTB system. First we describe the different characteristics of the trading systems and give potential reasons as to why they might differ in liquidity. Second we investigate empirically the liquidity provided by the two trading system. The comparison is especially interesting because the Bund Futures instruments traded are identical and the markets are open simultaneously. The intra-day data used in the study is from August 1997 to February 1998. The results show that the APT has smaller spread but the DTB is slightly deeper.     

做空机制对我国股市波动性影响的实证分析

我国融资融券业务于2010年3月31日正式启动,而作为一种资本市场机制,做空机 制一直以来都饱受理论界和实务界的争议,做空机制对市场波动的影响尚未达成一致结论。本 文考察了做空机制与市场波动性之间的关系。研究发现：（1）在样本期间内,市场波动与做空 机制之间存在长期的稳定关系;（2）买空交易会在一定程度上增加市场波动,而卖空交易会 在一定程度上降低市场波动,但是二者的影响均有限;（3）综合来看,做空机制并不会引起证 券市场的异常波动,即使市场出现了大幅度的震荡,也不是由于卖空机制本身造成的;（4）本 文认为进一步完善做空机制尤其是卖空交易机制有助于稳定市场。本文结论对于评估做空机 制对市场波动的影响,防范经济冲击风险以及加强市场监管具有重要启示。     

Earnings quality and short selling: Evidence from real earnings management in the United States

Prior research provides evidence consistent with managers using real earnings management (REM) to increase earnings. This study examines whether short sellers exploit the overvaluation of firms employing REM. I find that firms with more REM have higher subsequent short interest. The positive relation between REM and short interest is more pronounced in settings where the costs associated with accrual‐based earnings management are high, such as when a firm has low accounting flexibility or faces greater scrutiny from a high quality auditor. I also find some evidence that short sellers respond to REM more than to other fundamental signals of firm overvaluation. My inferences are robust to the use of propensity score matching. Collectively, my evidence suggests that short sellers not only trade on REM information, but they also trade as if they understand the substitutive nature of alternative earnings management methods. This study provides additional insight into the important role that short sellers play in monitoring managerial operating decisions and overall earnings quality.     

The puzzling behavior of short sellers around earnings announcements

We examine the performance of ‘predictive’ and ‘reactive’ short sellers who take relatively large short positions immediately before and after quarterly earnings announcements, respectively. While both types short into advancing markets, it is surprising for reactive shorts since their trades are in stocks that just announced unexpected good news and thus, according to the post-earnings announcement drift anomaly, will subsequently have abnormally high cumulative returns. Nevertheless, we find that for both types of short sellers: (1) subsequent cumulative returns are significantly negatively related to the amount of abnormal short selling, suggesting they are informed, and (2) relative to non-earnings dates, the subsequent returns around earnings announcements are significantly more negative, indicating they appear to be adept at exploiting earnings announcements. Surprisingly, we find that the subsequent returns of reactive short sellers are significantly greater than those of predictive short sellers except for S&P 500 stocks, perhaps due to their greater analyst following. Importantly, we are left with two puzzles. First, reactive shorts would have significantly improved their performance had they based their trades on the size of standardized unexpected earnings (‘SUE’). Second, predictive shorts of Micro stocks would have significantly improved their performance had they simply waited until earnings were announced and then based their trades on SUE.     

Informed trading on debt covenant violations: the long and short of it

We examine whether disclosure of complex information events reduces information asymmetry by investigating the long‐ and short‐term impact of firms' disclosure of debt covenant violations on the probability of informed trading. We argue debt covenant violation disclosures provide informed agents with a long window of opportunity to trade on their private information largely due to the uncertainty arising from the debt renegotiation process. We find the probability of informed trading is greater after the disclosure, particularly when the violation outcomes are unresolved or where there is concern about possible future violations.     

Short selling,margin trading,and the incorporation of new information into prices

Utilizing daily data on Chinese stocks' short selling and margin trading activities and intraday stock trade and quote data, we find a positive association between the degree of information efficiency of stock prices and the intensity of short selling and margin trading. Short selling (margin buying) escalates during the 5 days immediately before significant negative (positive) information events, which suggests short sellers (margin buyers) anticipate forthcoming news. Using the adverse selection component of the bid–ask spread as a proxy, we find that short selling and margin trading are associated with an improved information environment. Taken together, our empirical evidence supports the conjecture that short selling and margin trading in the Chinese market help stock prices incorporate new information more efficiently. Utilizing the unique Chinese regulation, we also examine the role of brokerages authorized for such trading and document a non-linear relation between pricing efficiency and the number of authorized brokerages.     

Doing battle with short sellers: The conflicted role of blockholders in bear raids

If short sellers can destroy firm value by manipulating prices down, an informed blockholder has a powerful natural incentive to protect the value of his stake by trading against them. However, he also has a potentially conflicting incentive to use his information to generate trading profits. We show that a speculator can exploit this conflict and force the blockholder to buy a disproportionately large amount to prevent value destruction. This is costly for the blockholder because the trades must sometimes be executed at inflated prices. Given reasonable constraints on short sellers, a sufficiently large blockholder will have the incentive to absorb these losses and prevent a bear raid. However, conditions exist under which outside intervention may be warranted.     

The costs and benefits of short sale disclosure

In this study, we examine the impact of a market-wide mandatory disclosure policy on short selling on the Tokyo Stock Exchange. We find that average short selling slightly declined while investors’ shorting strategies changed significantly in response to the disclosure. Previously highly shorted stocks were shorted less and shorting activity shifted toward smaller and riskier stocks, suggesting that retail investors became the more likely short sellers. Short sales became more trend-chasing, prices became less informative, and short-term price volatility increased. Overall, the pricing efficiency benefits of short selling declined after the mandatory disclosure policy.     

Converse trading strategies,intrinsic noise and the stylized facts of financial markets

This paper proposes a simple asset pricing model with three groups of traders: chartists who believe in the persistence of bull and bear markets, fundamentalists who bet on a reduction of the observed mispricing, and investors who follow a buy-and-hold strategy. The innovative feature of the model concerns the frequency of trading: rather than remaining constant over time, each agent in a group is only assumed to become active with a certain probability over a given market period. Depending on the trading strategy, part of this elementary kind of intrinsic noise is additive and another part is multiplicative. Using bootstrap and Monte Carlo methods, it is demonstrated that this combination can contribute to explaining the stylized facts of the daily returns on financial markets, such as volatility clustering, fat tails, and the autocorrelation patterns.     

Short sellers and insider trading profitability: A natural experiment

We examine the impact of short sellers on insider trading profitability using a natural experiment of a pilot program which relaxed short-selling constraints for randomly selected pilot stocks. We find that pilot firms experienced a significant decrease in insider trading profitability during the pilot program. The results are more pronounced for the pilot firms with poor information quality, and for the pilot firms without corporate restrictions on insider trading. Our evidence suggests that short sellers serve an important market disciplinary role by reducing insider trading profitability.