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Informed or speculative trading? Evidence from short selling before star and non-star analysts’ downgrade announcements in an emerging market

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  • Meng, Qingbin
  • Li, Ying
  • Jiang, Xuanyu
  • Chan, Kam C.

Abstract

We examine informed vs. speculative trading among short sellers prior to analyst downgrades in China from March 2010 to August 2014. We do not find abnormal short selling in the days before downgrade announcements in the full sample. For the star (non-star) analyst subsample, however, we find significant (insignificant) abnormal short selling beginning 10 days prior to downgrade announcements. In addition, short sellers cut back their short positions when star analysts incorrectly upgrade. Hence, short sellers do not seem to know more than star analysts. With the timing of the short selling, our evidence indicates that star analysts might leak their research to certain short sellers before their downgrade announcements. Furthermore, we demonstrate that broker reputation and institutional investor ownership mitigate the relation between star analysts’ downgrades and abnormal short selling. Our results are robust to different measures of abnormal short selling, abnormal returns, event windows, star analysts’ impact, and endogeneity. Our overall findings suggest that short sellers are informed.

Suggested Citation

  • Meng, Qingbin & Li, Ying & Jiang, Xuanyu & Chan, Kam C., 2017. "Informed or speculative trading? Evidence from short selling before star and non-star analysts’ downgrade announcements in an emerging market," Journal of Empirical Finance, Elsevier, vol. 42(C), pages 240-255.
    • Handle: RePEc:eee:empfin:v:42:y:2017:i:c:p:240-255
    DOI: 10.1016/j.jempfin.2017.04.003
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    Cited by:

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    2. Zhu, Lin & Chen, Qinyuan & Yang, Shengzhi & Yi, Zhihong, 2021. "The role of analysts in negative information production and disclosure: Evidence from short selling deregulation in an emerging market," International Review of Economics & Finance, Elsevier, vol. 73(C), pages 391-406.
    3. Hou, Jianlei & Zhao, Shangmei & Yang, Haijun, 2020. "Individual analysts, stock return synchronicity and information efficiency," International Review of Financial Analysis, Elsevier, vol. 71(C).
    4. Ge-zhi Wu & Da-ming You, 2021. "Margin trading, short selling and corporate green innovation," Papers 2107.11255, arXiv.org, revised Aug 2021.
    5. Wenzhen Mai & Nik Intan Norhan Binti Abdul Hamid, 2021. "The Moderating Effect of Family Business Ownership on the Relationship between Short-Selling Mechanism and Firm Value for Listed Companies in China," JRFM, MDPI, vol. 14(6), pages 1-20, May.
    6. Hou, Deshuai & Meng, Qingbin & Zhang, Kai & Chan, Kam C., 2019. "Motives for corporate philanthropy propensity: Does short selling matter?," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 24-36.
    7. Jie He & Kam C. Chan, 2023. "Does short sales deregulation affect qualitative information disclosure?," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(S1), pages 1351-1380, April.
    8. Li, Shan & Mihaylov, George & Peranginangin, Yessy & Zurbruegg, Ralf, 2021. "Short selling patterns in cross-listed stocks," Global Finance Journal, Elsevier, vol. 48(C).
    9. Wenzhen Mai & Nik Intan Norhan binti Abdul Hamid, 2021. "Short-Selling and Financial Performance of SMEs in China: The Mediating Role of CSR Performance," IJFS, MDPI, vol. 9(2), pages 1-16, April.
    10. Li, Qian & Wang, Jiamin & Bao, Liang, 2018. "Do institutions trade ahead of false news? Evidence from an emerging market," Journal of Financial Stability, Elsevier, vol. 36(C), pages 98-113.
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