Short-selling restriction and return predictability: Evidence from China

Abstract

We examine how the ban on t+0 short selling affects the return predictability of short sellers in China. If the ban drives out mostly less informed short sellers, then the return predictive power should be enhanced. However, if the ban drives out more informed short sellers instead of less informed short sellers, then the return predictability should worsen. We find that in China, where the stock market is dominated by retail investors, and short-selling activities are not active, the ban is likely to drive out more informed short sellers, and thus, worsen the predictive power of short selling.