Does Short Selling Enhance the Allocational Role of Stock Price? Evidence from Hong Kong

Abstract

We investigate the real effect of short selling on corporate investments and, in particular, examine whether short selling improves managerial learning from stock prices in making investment decisions. We find that short selling improves investment sensitivity to stock price, most likely through a channel that short selling increases stock price informativeness. Using the lifting of uptick rule for index arbitrageurs and market makers as an exogenous shock to short selling intensity, we confirm the causal effect of short selling on managerial learning. Overall, our evidence suggests that short selling enhances the role of stock price in resource allocation.

The impact of short-selling on market efficiency and liquidity: Evidence from the emerging market of Egypt

“…Hence, the third null sub-hypothesis is accepted; indicating that the activation of short-selling would not affect informativeness. This is inconsistent with Engelberg et al (2012), Chang et al (2014), Jiang and Pang (2016), Blau and Whitby (2018). Besides, Liq 1 has a significant positive relationship with informativeness at 0.01 level.…”

“…Further, Chen et al (2016) conclude that stock prices' information efficiency has a positive association with short-selling intensity. Jiang and Pang (2016) found that short-selling improves investment decisions through increasing stock price informativeness. Jin et al (2018) indicated that short-selling facilitates the flow of unfavorable news into stock prices that would improve stock price discovery and information efficiency.…”

“…Market liquidity is tested through; trading activity and volume, bid and ask, and turnover ratio and volatility. Since the effect of short-selling on the market would vary according to industry type or company size (Chen et al, 2016;Jiang and Pang, 2016;Hu and Chi, 2019), they are included as control variables in the regression models. Furthermore, as various measures of liquidity are likely related…”

Does the Market Know? Going Concern Opinion Release and Firm Fundamentals

“…Thus, this study contributes to the understanding of the investment value of going concern announcements, which is shown in the market measure of both ordinary investors (momentum) and sophisticated investors (short selling volume). It also points out that the market and especially sophisticated investors (short sellers) are likely to predict upcoming negative corporate news based on both the material information contained in financial reports and market indicators (Jiang and Pang, 2016;Meng, Li, Jiang and Chan, 2017;Cheung, Hung, Lam, and Leung, 2018. ) The next section describes our sample and methodology in examining the market's ability in predicting the going concern opinion release and possible channels.…”