Margin Trading On The Stock Pricing Efficiency

As one of the most vital trading mechanisms, short sales and margin purchases has becoming an important component of the fundamental trading system with the development and diversification of the capital market。Based on the theory of Miller(1977), the activities of short sales and margin purchases decrease the short sale constraints of the market, therefore, the price discovery function improves and the pricing efficiency enhances.We use the short sale data in SSE and SZSE mainland China to test whether short sale constraints can prevent negative information from being impounded into prices and lead to overpricing (Miller(1977)). The relationship between short sale constrains and the price informativeness/market returns is analyzed, together with the moderator effect of the heterogeneous believes in between.Based on event studies and panel data regressions, we argue that the release of short sale constraints boosts the stocks'price informativeness, but net short sale ratio has limited power in the prediction. However, that ratio is still a powerful predictor of the future stock returns as well as heterogeneous believes, while their interaction effect is not clear. Our result suggests that short sales improve the informativeness of stocks and speed the price adjustments to bad news, which support Miller's model.