Short-selling And Pricing Efficiency Of Capital Market

Compared with the mature stock market,China's A-share market has many defects.As a result,there are serious problems in pricing efficiency.The stock price contains a lot of "noise",not only the price synchronization exists high,even general political events and rumors may cause the entire market to skyrocket(Morck et al.,2000).In addition,China's stock market is often referred to as a "policy market",which means that economic policies have a great influence on the rise and fall of the capital market.The academic and practical circles generally believe that one of the important measures to deal with the above-mentioned problems is to relax short-selling constraints.In this context,the margin trading system was introduced to the Chinese market on March 31,2010.However,since the introduce of the margin trading system,doubts about the relaxation of short-selling restrictions have always existed.An obvious question is,what impact will the short-selling mechanism have on China's capital market? Therefore,this paper investigates the causal influence,mechanism and heterogeneity of short selling and capital market pricing efficiency from three levels: stock liquidity,stock price stability and stock price information.Specifically,the basic content and research conclusions of this article are as follows:Firstly,based on the theory of short-selling mechanism and stock liquidity,this article examines the causal influence of short-selling mechanism on stock liquidity from two aspects: liquidity of individual stocks and liquidity.The empirical analysis uses data of A-share companies from 2010 to 2018 as sample,and based on the related theories of short-selling and liquidity,using fixed-effect models,instrumental variables,and the "refinancing securities" system as a natural experiment to investigate the causal relationship between short-selling and stock liquidity.The results show that the short-selling enhances the liquidity of individual stocks and reduces the commonality of liquidity at the same time.Secondly,this article divides stock price stability into two aspects: stock price heterogeneous volatility and stock collapse risk,and uses related theories and empirical models to investigate the causal influence of short selling on stock price stability.The study found that short-selling transactions suppressed the heterogeneous volatility of stock prices and also reduced the risk of stock collapse.After alleviating the endogenous problems,the conclusion is still stable.In order to further strengthen the depth of the research question,this article also expands in two aspects: On the one hand,This article examines whether short selling has long-term effects on stock price stability,which further supports the two research hypotheses of this article.At the same time,since this part examines the long-term impact of short-selling securities,it further eliminates the interference of reverse causality on the estimation results.On the other hand,this article examines the impact of short-selling mechanism on stock price stability from the unique perspective of investor sentiment,and finds that,the short-selling mechanism can suppress investor sentiment.This conclusion further deepens the prediction of the basic theory,and together with the basic conclusion,it provides solid evidence for the stock price stabilization effect of the short-selling mechanism.Thirdly,this article examines the causal impact of short-selling transactions on stock price information from the dual perspectives of non-synchronization of stock prices and overvaluation of stock price.The results show that the short selling improves the asynchrony of the stock price and reduces the overvaluation of the stock price.After effectively alleviating the endogenous problem,the above conclusion is still valid.The above conclusion means that the short-selling mechanism can increase stock price information,thereby improving pricing efficiency.Fourthly,this article further examines the mechanism by which short-selling affects pricing efficiency(liquidity,stability,stock price information content).In order to answer this question,this article focuses on the role of short-selling affecting pricing efficiency: corporate information transparency.On the one hand,the main way for short-selling investors to profit is to dig out negative corporate information(Diamond& Verrecchia,1987),which greatly increases the cost of corporate management tohide negative information.When the relaxation of short-sale constraints leads to increased downward pressure on stock prices,in order to avoid shrinking of their own wealth,managers must disclose information in a timely,accurate and compliant manner;on the other hand,short-sellers continuously integrate negative corporate information into stock prices,It will attract analysts to follow and reduce the information asymmetry between companies and investors.The improvement of corporate information transparency will undoubtedly improve the efficiency of capital market pricing.This paper finds that short-sale transactions do improve the efficiency of capital market pricing through corporate information transparency channels.Finally,this article examines whether there are differences in the impact of short selling on pricing efficiency under different constraints.Specifically,we focus on the different external governance environments(analyst tracking frequency,product market competition),different internal governance environments(management power,corporate growth,property rights),and different market conditions.The research results show that the effect of short-selling on the efficiency of capital market pricing(liquidity,stability,and stock price information)is more pronounced on worse governance environments and during the bull market.Because companies with the above characteristics generally have low information transparency,this research conclusion shows that the short-selling mechanism can improve the efficiency of capital market pricing by improving corporate information transparency again.The contributions are reflected in the following aspects: First,this research solves the long-standing endogenous problems in the domestic "short selling and pricing efficiency" literature.Generally speaking,the literature discussing "short selling and pricing efficiency" in the context of China generally uses the margin financing and securities lending system reform to alleviate possible endogenous problems.However,from the perspective of the margin trading system,there are at least two problems: On the one hand,margin financing and securities lending are two completely different behaviors,and their impact on pricing efficiency is obviously different.Therefore,using this reform as an explanatory variable,it is difficult to completely attribute the economic consequences to short-selling;secondly,when the regulatory authorities addor remove the short selling targets,they usually use liquidity,volatility and other indicators as the basis for decision-making,leading an endogenous problem of mutual influence between short selling and pricing efficiency.In other words,this reform can hardly be regarded as a purely exogenous event for studying short-selling behavior.Based on the above considerations,this article comprehensively uses the instrumental variable method and takes the “Qualified Securities for Short-sale Refinancing”system as a natural experiment to alleviate the endogenous problems faced by this field.Secondly,from the perspective of micro-enterprises,it examines the channels through which the short-selling mechanism affects the pricing efficiency of the capital market,thereby further clarifying the causal relationship between the short-selling mechanism and the pricing efficiency.The empirical research in this article has found that after the short-sale constraints are relaxed,when short-seller investors discover that the management of the company is hiding negative information about the company,they can use this news to short the company's stock,because the short-seller is informed Traders,their actions are likely to cause small and medium shareholders to follow their steps,leading to a decline in stock prices.Generally speaking,the managers' career and salary are closely related to the stock price,so a drop in stock price is likely to cause a manager's career crisis or salary reduction.Considering this unfavorable "snowball" effect,managers must disclose information in a timely,accurate and compliant manner.The transparency of corporate information is precisely the core factor affecting the pricing efficiency of the capital market.The empirical research verifies that there is indeed a transmission mechanism:short selling ? improved corporate information transparency ? improved pricing efficiency under the Chinese scenario.Finally,although scholars have paid attention to the relationship between short selling and pricing efficiency,but it is still difficult to clarify the criteria for selecting securities-selling targets based on the existing literature.According to the goal of improving the pricing efficiency of the capital market,what characteristics should the securities lending target enterprise have? Do different market conditions affect the effect of short selling? This article attempts to answer these questions through the analysis of empirical data,and provide a basis forthe regulatory authorities to choose the target of short selling.