Short-sale prohibitions, firm characteristics and stock returns: evidence from Chinese market

Purpose - The purpose of this paper is to empirically analyze the impacts of short prohibitions on stock prices. Design/methodology/approach - The authors adopt event study in this paper. First, the authors match each shortable stocks with one unshortable stocks by the propensity score matching method. Second, the authors check the performance difference between treatment group and control group after the event date. Third, the authors check the performance difference among sub-groups sorted by other factors associated with stock returns. Findings - The authors find that stocks do not decline necessarily after removal of short prohibitions; only those heavily overpriced stocks, such as small stocks, lower B/M or P/E stocks and higher turnover stocks, decline significantly. Research limitations/implications - The media falsely stated that short selling lead to market crash; otherwise, short selling is beneficial for improving market efficiency as it is helpful for keeping overpriced stocks in line with the fundamental value. Originality/value - This is the first paper showing that removal of short prohibitions only impacts heavily overpriced stocks significantly, which is valuable for policy making.