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Short-selling Activity and Return Predictability: Evidence from the Chinese Stock Market

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  • Lanlan Liu
  • Dan Luo
  • Ningru Zhao

Abstract

We examine the informativeness of short selling in the Chinese stock market based on monthly and daily short-interest data from January 2011 to July 2018. We find that short selling negatively predicts future stock returns in China. The pattern is robust when controlling for firm size, book-to-market ratio, and liquidity. A long-short strategy using a short-interest ratio (SIR)—shares shorted to shares outstanding—generates a 0.865% monthly return. We also document that return predictability is stronger when short selling is restricted. Meanwhile, we examine the information content of short-selling activity, and we confirm that the significant negative relationship between preannouncement short activity and post-announcement period returns.

Suggested Citation

  • Lanlan Liu & Dan Luo & Ningru Zhao, 2020. "Short-selling Activity and Return Predictability: Evidence from the Chinese Stock Market," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 56(14), pages 3445-3467, November.
    • Handle: RePEc:mes:emfitr:v:56:y:2020:i:14:p:3445-3467
    DOI: 10.1080/1540496X.2019.1694895
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    Cited by:

    1. Fan, Yi & Gao, Yang, 2024. "Short selling, informational efficiency, and extreme stock price adjustment," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1009-1028.
    2. Lu, Pu & Wang, Yong & Li, Bing, 2024. "Short selling and corporate financial fraud: Empirical evidence from China," International Review of Economics & Finance, Elsevier, vol. 89(PA), pages 1569-1582.

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