Analysis on the Benefits and Reasons Why Short Sale Should Not Be Prohibited

Many enterprises, especially those in China, lack systematic knowledge and understanding of the shorting mechanism. In China's A-share market, due to the long-term lack of short-selling mechanism and the habit of traditional ways of thinking which is largely limited to long-selling, most of these enterprises fail to pay sufficient attention to the possible short-selling risks. Under the inherent cognitive and thinking framework, they fail to form a systematic understanding of the short sale and its possible impact. More importantly, previous studies have investigated the role each company or institution plays in a shorting process, however, very few of them lay emphasis on the value and positive impacts provided by the short sale as well as why it is necessary to exist. Therefore, the purpose of this paper is to demonstrate shorting should not be prohibited. The author studies the case of Muddy Waters shorting Luckin Coffee to analyze the causes of the incident and its impact on the capital market. Then, the author discusses the possible benefits of shorting of the capital market and how the regulatory system regarding this can be improved in the future. This paper concludes that short-selling should not be prohibited because of its benefits in monitoring companies, optimizing resource allocation, improving information timeliness, improving market liquidity and so on.