Margin Trading Before Earnings Announcement

Since the formal implementation of the margin trading in March2010, short selling mechanism (margin trading mechanism) is introduced and China’s stock market stepped into the era of bilateral trade. In other countries, short selling mechanism (margin trading mechanism) comes with the securities trading. It has400years of development, during which has attracted widespread attention and discussion from investors, issuers, regulators, the media and academia. Similarly, for the introduction of this new system in China, our research and discussion is necessary in order to make the system more effective specification development.This paper studies the relationship between margin trading before earnings announcement and stock price returns after the earnings announcement in order to find out whether it contains informed trading. The sample period is from January1,2011to December31,2013, and the data source is the Chinese margin trading market information disclosure, collected by GTA data. This paper examines the main two questions. The first test is to test whether the margin trading before the announcement and after the announcement is not the same. When we see that there are considerable differences, we further test the margin trading focus before a significant negative announcement. The second test is to test whether margin traders target the companies based on the public information. We took SUE (standardized expected earnings) and book-to-market ratios as strategy analysis. The result is that there are some investors using private (correct) information to target the stocks for margin trading.According to the conclusions of this study, the margin trading appears to focus before negative earnings announcement coming out to the public. We suggest the supervisors should make margin trading information to public in time, in order to reduce information asymmetry and improve the efficiency of financial market. In addition, since there are some investors are informed traders, we suggest the supervisors should improve the legal regulation to strengthen the supervision.