The announcement and implementation reaction to China's margin trading and short selling pilot programme

Abstract

Purpose – The purpose of this paper is to investigate how the announcement and implementation of short sales and margin trading regulation affects Chinese stock returns and trading volume. On 31 March 2010, the Chinese regulators launched a pilot programme, allowing short sales and margin trading for 50 Shanghai Stock Exchange and 40 Shenzhen Stock Exchange stocks. Design/methodology/approach – This paper uses an event study approach to compare market model abnormal returns (ARs) of the pilot firms with two distinct matched firm samples. A volume event study is also conducted to examine abnormal trading activity surrounding the key events in the pilot stocks. Findings – Negative ARs follow both the announcement and implementation of short selling and margin trading. This suggests the negative impact of short sales dominates the positive impact of margin trading on an average. Volume also declines, which is consistent with uninformed investors’ seeking to avoid trading against informed traders. Originality/value – The paper appears to be the first to address the impact of both the announcement and implementation of short selling and margin trading rule changes on returns and liquidity using individual stock data.

Short-selling, margin-trading, and price efficiency: Evidence from the Chinese market

“…The negative cumulative return is persistent and not followed by any evident reversal, consistent with the results in Table 2. In summary, stock returns realized upon the implementation of short-selling and margintrading tend to be negative. Sharif et al (2012) report consistent evidence when examining the returns for a subset of 90 addition events in the first batch on March 31, 2010. The results confirm our conjecture that, although both short-selling and margin-trading were banned before the event, the constraint on short-selling was more binding.…”

Costly and Unprofitable Speculation: Evidence from Trend-Chasing Chinese Short-Sellers and Margin-Traders

“…This study is complementary to Sharif et al (2012a,b). Sharif et al (2012b) investigate the market reaction to the addition event of the first batch of 90 stocks to the designated list in March 2010 in China. They find negative abnormal returns on both the announcement and implementation days, supporting Miller's (1977) overvaluation hypothesis.…”

Against the tide: the commencement of short selling and margin trading in mainland China

“… A MSCI research bulletin also considers this event from the perspective of A‐H share premiums, while Wang () considers informed trading around the introduction of Chinese margin trading, Wang () looks at the link between idiosyncratic risk and returns around the implementation of the Chinese regulation, and Sharif et al . () examine the announcement and implementation of the regulation change using an event study approach. …”