The Announcement and Implementation Reaction to China’s Margin Trading and Short Selling Pilot Programme

Abstract

Purpose - – The purpose of this paper is to investigate how the announcement and implementation of short sales and margin trading regulation affects Chinese stock returns and trading volume. On 31 March 2010, the Chinese regulators launched a pilot programme, allowing short sales and margin trading for 50 Shanghai Stock Exchange and 40 Shenzhen Stock Exchange stocks. Design/methodology/approach - – This paper uses an event study approach to compare market model abnormal returns (ARs) of the pilot firms with two distinct matched firm samples. A volume event study is also conducted to examine abnormal trading activity surrounding the key events in the pilot stocks. Findings - – Negative ARs follow both the announcement and implementation of short selling and margin trading. This suggests the negative impact of short sales dominates the positive impact of margin trading on an average. Volume also declines, which is consistent with uninformed investors’ seeking to avoid trading against informed traders. Originality/value - – The paper appears to be the first to address the impact of both the announcement and implementation of short selling and margin trading rule changes on returns and liquidity using individual stock data.