An Empirical Analysis Of The Impact Of Short-sales On Stock Price

Margin trade has introduced in China’s equity for almost two years, it is of significance to test its function. Using data from the Shanghai Stock Exchange and the Shenzhen Stock Exchange, this study empirically examines the impact of short-selling on China’s equity markets. We focus on the relationship between short-selling and stock price. First, according to Miller’s overvaluation theory,we analyze whether short-sales constraints tend to cause stock overvaluation on China’s equity markets and that the overvaluation effect is more dramatic for stocks when wider dispersion of investor opinions exists. Then, we also examine the impact of short-selling on price efficiency especially price lag.Compared to others, the thesis also examine deletion events besides addition events of target stocks in the short-selling list and adds stock index futures as a dummy variable.The results are consistent with Miller’s intuition and other optimism models. We also document less price lag when short sales are allowed. We hope the results can support the regulators to further perfect short sales in China.