Can Short-Selling Alleviate the Underpricing?

Abstract

A B S T R A C TThis paper investigates whether short-selling facilitates arbitrage activity and mitigates the positive post-earnings announcement drift (PEAD), the well-known underpricing anomaly. Using the quarterly earnings announcement of the Korean Stock Exchange KOSPI200 composite stocks, we find that the positive earnings stock in a difficult-to-short industry experiences the larger and more persistent underpricing after earnings announcement than those in an easy-to-short industry; and that the severe underpricing in a difficult-to-short industry is associated with the short-sale constraint, not with their illiquidity or information inefficiency. We also find that the inverse relationship between the positive PEAD and its industry's short-ability is stronger during the inactive ELW trade period, weaker during the active ELW trade period. Our findings suggest that short-selling help not only the overpriced stocks but also the underpriced stocks revert back to its fundamental value by facilitating arbitrage activities.

An Analysis of the Performance of the “1/N” Naïve Portfolio Strategy in Korean Stock Markets

“…In addition, the meanvariance portfolios with short sale constraint and Bayes-Stein portfolios with short sale constraints have a higher CEQ than is obtained by employing the 1) This approach is used generally until recently. Wang and Lee (2017) use the equal weighted portfolio strategy as a benchmark in their study. Incidentally, although there is not found asset allocation strategies that is always dominant on "1/N" portfolio strategy in terms of performance, it does not mean "1/N" portfolio strategy performs best in any sample sets.…”