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Short-selling and mutual fund herding: The Chinese evidence

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  • Feng, Lixuan
  • Xiang, Cheng

Abstract

Using short-selling pilot programs in China as quasi-natural experiments, we investigate how short-selling impacts mutual fund herding. We find that mutual funds herd more on firms eligible for short-selling than those not. The effect is larger for firms with fewer media coverage, higher financial reporting opacity, or lower audit quality. Channel tests show that short-selling decreases information asymmetry proxied by informed trading and stock illiquidity. Additionally, short-selling strengthens the price impact of herding without causing reversals. Our findings fit the correlated signal theory: mutual funds receive more similar information on firms eligible for short-selling and, thus, herd more on them.

Suggested Citation

  • Feng, Lixuan & Xiang, Cheng, 2023. "Short-selling and mutual fund herding: The Chinese evidence," Finance Research Letters, Elsevier, vol. 52(C).
    • Handle: RePEc:eee:finlet:v:52:y:2023:i:c:s1544612322006936
    DOI: 10.1016/j.frl.2022.103517
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    1. Liu, Jia & Fu, Pengju & Lin, Chunyan, 2023. "Rule improvements and irrational characteristics of herd behaviour–The effects of SMT policy," Finance Research Letters, Elsevier, vol. 56(C).

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    More about this item

    Keywords

    Short-selling; Mutual fund herding; Correlated signal theory; Information asymmetry;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G20 - Financial Economics - - Financial Institutions and Services - - - General

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