Kaiguo Zhou

1
The Impact of Short Selling on China Stock Prices

• Kaiguo Zhou
• Sun Yat-sen University, Guangzhou, China
• Michael C S Wong
• City University of Hong Kong, Hong Kong, China

2
Reading Questions

• When were short selling of stocks permitted in
  China stock market?
• How many stocks are permitted to be short sold?
• What methodology is used to study the impact of
  short selling on stock prices?
• What is the null hypothesis in the empirical
  study?
• What is the empirical result in this study?
• What is the implications of the empirical results
  in China stock market?

3
Background of Short Selling in China

• Before March 31, 2010, short selling had always
  been prohibited in Chinese stock market.
• On March 30, 2010, China Securities Regulation
  Committee (CSRC) formally announced the permit
  of margin purchase and short selling.
• CSRC approved a total of 90 selected stocks in
  Shanghai and Shenzhen exchanges for the trial run
  of the new reform.
• Short selling started on March 31, 2010.

4
Methodology

• Event Study Method
• The relationship between the returns of a stock
  and the market is estimated with the 60-day data
  before the event date. Then Beta coefficient is
  estimated.
• Rj, t-h a b Rm, t-h ej, t-h , where h
  1 to 60
• After the event date (t), abnormal return of
  Stock j at date tk is estimated by
• ARj,tk Rj,tk a b Rm,tk, where k 1
  to 20
• Cumulative abnormal return of Stock j at date tk
  (CARj,tk) is obtained by
• CARj,tk ARj,t1 ARj,t2 ARj,tk
• The t-test is used to test whether the AR and CAR
  are significantly different from zero.

5
Test Group and Control Group

• Top 30 stocks allowed for short selling in terms
  of market capitalization are selected to form the
  test group.
• Correspondingly, 30 stocks not allowed for short
  selling are selected to form the control group.

6
Null Hypothesis

• The null hypothesis is that short selling does
  not affect stock prices. That is,
• Average ARj, tk of the test group should be
  equal to 0.
• Average CARj, tk of the test group should be
  equal to 0.
• The line of the CAR of the test group should be
  flat.
• There should be no difference between the test
  group and control group in terms of above stock
  returns.

7
Empirical Results

• The test group shows negative abnormal return,
  while the control group does not.
• The cumulative abnormal return for the test group
  is significantly negative.
• The CAR for the control group are not
  significantly different from zero.
• The CAR line for the test group is deeply
  downward sloping, but no apparent upward or
  downward sloping trend is found for the control
  group.

8
Empirical Results

• The trend of CAR within the test window for the
  test group

9
Empirical Results

• The trend of the CAR of both the Test Group and
  the Control Group
• It shows that the CAR of the test group is
  significantly lower than that of the control
  group.

10
Conclusion

• Stocks allowed for short selling tend to have
  worse performance than those not allowed for
  short selling.
• The allowance of short selling can make stock
  price lower.
• Short selling provides a tool for informed
  investors to correct overpricing.
• In the long run, this may mitigate the occurrence
  of stock market bubble.