Margin-Trading and Short-Selling with Asymmetric Information

Résumé

By studying the Chinese margin-trading and short-selling program, this paper provides evidence that allowing margin-trading and short-selling has a negative effect on liquidity because of the information asymmetry that makes uninformed investors reluctant to trade. The mechanism is further verified by the fact that this effect is more pronounced for stocks (1) without analyst coverage; (2) with larger standard deviation in analysts’ EPS forecasts; or (3) with fewer institutional shareholders. The study of the Chinese security refinancing business also finds a negative liquidity effect, which provides a robustness check. I also find evidence that short-selling improves price discovery.