Short-sale refinancing and price adjustment speed to bad news: Evidence from a quasi-natural experiment in China

Short selling may accelerate stock price adjustment to negative news.However,the literature provides mixed evidence for this prediction.Using short-sale refinancing and a staggered difference-in-differences(DID)model,this paper explores the effect of short selling on stock price adjustment.Our results show that(1)short-sale refinancing improves the speed of stock price adjustment to negative news.This result holds after we control for endogeneity.(2)The positive relationship between short-sale refinancing and stock price adjustment speed is significant in subsamples of stocks with higher earnings management or lower accuracy of analyst forecasts,indicating that firms with more opaque information are more likely to be targeted by short sellers.In subsamples of stocks with a higher ownership concentration or lower ownership by institutional investors,short selling is more likely to increase the speed of stock price adjustment,indicating that ownership structure may influence negative news mining.(3)As short-sale refinancing exacerbates the absorption of bad news by stock prices,it increases crash risk.This study enriches the research on the economic consequences of short selling and provides empirical evidence supporting regulations on short selling in China.

Is refinancing solely motivated by misappropriation?

Misappropriation has become the accepted explanation for the refinancing behavior of Chinese listed companies, although the evidence in support of such an explanation is worthy of further discussion. We argue that if a planned refinancing exercise does not become a reality, post-refinancing performance depends on the initial motivation for refinancing, i.e. misappropriation or the maximization of firm value. The success and failure samples provided by the approval system of the Chinese securities market provide us with a natural laboratory in which to distinguish between these two possible motivations for the refinancing behavior of Chinese listed firms. The results show the postrefinancing performance of firms in the success sample to be significantly better than the performance in the failure sample, with the difference even more significant when larger agency costs or more financial constraints exist. These findings indicate that Chinese listed companies do not engage in refinancing for misappropriation purposes alone. Rather, refinancing is more likely to be a rational choice made in full consideration of the costs and benefits. This paper provides new ideas for reexamining the motivations for the refinancing behavior of China's listed firms. It also has one major policy implication. That is, relaxing and/or simplifying the country's refinancing regulations could help to improve the efficiency of resource allocation in the Chinese securities market.

Selective enforcement of regulation

Regulatory agencies may,whether outside of set rules or within their discretion,depart from the original goals or principles set for enforcing the rules,which we term selective enforcement.Taking China,a country in transition,as an example,and using cases and large-sample tests,we present empirical evidence of selective enforcement.The results show that the China Securities Regulatory Commission(CSRC) takes into account whether companies violating the rules have a state-owned background and the strength of that background when investigating and punishing non-compliance.After controlling for the degree of violation,state-owned-enterprises(SOEs) are punished less severely than private companies;and the higher the hierarchy of the SOE in question,the less severe the punishment.It also takes longer for SOEs to be punished.We also find that companies that violate the rules less seriously have a greater tendency to apply for refinancing than those that violate the rules more seriously.This may be because the severity of the violation can affect listed companies' expectations of obtaining refinancing.The analysis and conclusions of this study prove useful in understanding the causes and consequences of selective enforcement in transition economies.