Short Sale, Margin Purchase, and Stock Price Crash Risk

Abstract

We investigate the impact of short-sale and margin-purchase on stock price crash risk in the Chinese markets. China lifted bans on short-sale and margin-purchase for stocks on an expanding designated list since March 2010. Results of difference in different tests reveal that the removal of bans on short-sale and margin-purchase is followed by a reduction in stock price crash risk over the subsequent six months. Utilizing firm-level daily short-sale and margin-purchase turnover data, we find that short sales reduce future stock price crash risk whereas margin purchases add to the risk.