The Effect Of Short Selling On Pricing Efficiency

Price efficiency is an important indicator of the effectiveness of the capital market.Under the Efficient Market Hypothesis,short selling plays a crucial role in the effectiveness of resource allocation,price efficiency is much higer in capital markets with mature margin trading mechanism.In recent years,a large number of Chinese companies have gone public overseas,but many"Chinese stocks"have been shorted by overseas institutions in mature capital markets.Those companies provide samples for studying how short selling affects price efficiency.Based on the case of Glaucus shorting Hengan,this paper deeply analyzes how does shorting affects pricing efficiency and disclose the formation mechanism of the stock price.This paper uses Stock Price Synchronicity and Idiosyncratic Volatility to measure pricing efficiency.Stock Price Synchronicity is the Goodness of Fit((~2)of a linear regression Market Model Method.Idiosyncratic Volatility represents the variance of the residual term of Fama-French 3-factor model.Then this paper analyzes how the two pricing efficiency indicators have changed.Both results are the same:Both Stock Price Synchronicity and Idiosyncratic Volatility,as measures of pricing efficiency,shows a significant decline in the short term,but in the long run it gradually rises up until 270-300 trading days.This article further analyzes the the influence mechanism of short selling on pricing efficiency from the perspectives of information disclosure,signal transmission,Market Attention and liquidity.Firstly,Glaucus discloses more private information to reducethe information asymmetry;Secondly,Hengan releases signal that stock price is undervalued through stock repurchase Thirdly,Securities analysts and media reports sending messages to investors Reducing information search cost and information asymmetry.Lastly,stock trading provides sufficient liquidity in the short term,thus promoting the improvement of its pricing efficiency.This article also analyzes the impact of short selling from the view of market reaction.This paper uses the event study method to analyze the response of the capital market.The result shows shorting led to a decline in CAR,but hengan's counteraction effectively improved CAR and eliminated the negative impact of shorting on its CAR on the 55th trading day.Finally,this paper gives some suggestions from the perspectives of companies,market supervision and investors.The first innovation in this article is the research theme.This paper firstly studies the impact of institutional short selling on pricing efficiency.The second innovation in this article is the research method.In this paper,case studies have firstly been used on the analysis of the problems.