Short-selling activity and return predictability: evidence from the chinese stock market

Liu, L., Luo, D. and Zhao, N. (2019) Short-selling activity and return predictability: evidence from the chinese stock market. Emerging Markets Finance and Trade. pp. 1-23. ISSN 1558-0938 doi: 10.1080/1540496x.2019.1694895

Abstract/Summary

We examine the informativeness of short selling in the Chinese stock market based on monthly and daily short-interest data from January 2011 to July 2018. We find that short selling negatively predicts future stock returns in China. The pattern is robust when controlling for firm size, book-to-market ratio, and liquidity. A long-short strategy using a short-interest ratio (SIR)—shares shorted to shares outstanding—generates a 0.865% monthly return. We also document that return predictability is stronger when short selling is restricted. Meanwhile, we examine the information content of short-selling activity, and we confirm that the significant negative relationship between preannouncement short activity and post-announcement period returns.