Short-Sale Constraints and Stock Prices: Evidence from Implementation of Securities Refinancing Mechanism in Chinese Stock Markets

Qualified Securities for Short-sale Refinancing (QSSR) is a unique trading mechanism that has exogenously increased the supply of loanable securities in Chinese stock markets. Using difference-in-differences (DID) methodology, this paper is the first to investigate whether and to what extent additions to the QSSR eligibility list affect short selling activities and stock price behaviors. The paper finds that stocks added to the QSSR list exhibit better liquidity and less negative skewness in returns than non-QSSR stocks. However, QSSR stocks are more volatile and display a higher frequency of extreme negative returns. In addition, on average, QSSR stocks experience larger negative abnormal returns (ARs) and cumulative abnormal returns (CARs) relative to non-QSSR stocks, and the difference in CARs is positively related to investor heterogeneity. The results indicate that short selling has mixed effects on stock prices. Removing short-sale constraints can improve liquidity and reduce price bubbles, but can also increase return volatility and amplify market crashes.