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Do Short Sales Reduce Post-Shock Anomalies in Stock Prices? Evidence from the Chinese Stock Market

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  • Haojun Chen

    (International School, Guangzhou Huali College, Guangzhou 511325, China)

Abstract

This study investigates the role of short sales in mitigating post-shock anomalies in stock returns within the context of China’s evolving short-sales regulations. Utilizing a unique dataset of daily short-sale volumes, this research examines how short sellers influence stock price behavior following significant price shocks. The findings reveal that short sellers act as informed arbitragers, reducing post-shock anomalies, particularly in news-driven events, and supporting Diamond and Verrecchia’s hypothesis that short-sale constraints slow price adjustments to information. This study fills a critical gap in the literature, offering insights into price efficiency and implications for regulators and investors. By highlighting the unintended consequences of restrictive short-sale policies, this paper recommends reforms to reduce borrowing costs, enhance lending programs, and promote effective short-selling practices. These results contribute to the broader understanding of market dynamics, particularly in emerging markets with tight short-sale restrictions like China.

Suggested Citation

  • Haojun Chen, 2025. "Do Short Sales Reduce Post-Shock Anomalies in Stock Prices? Evidence from the Chinese Stock Market," IJFS, MDPI, vol. 13(1), pages 1-24, January.
    • Handle: RePEc:gam:jijfss:v:13:y:2025:i:1:p:7-:d:1564374
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    References listed on IDEAS

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