"Can Shorts Predict Returns? A Global Perspective", co-authored by Zhang Xiaoyan, Xinyuan Chair Professor of Finance and Associate Dean at the PBC School of Finance (PBCSF), and Zhang Xinran, doctoral student at PBCSF, the paper was accepted by the Review of Financial Studies. 

Short-sellers, as important players in the stock market, play a role in curbing stock bubbles and improving price efficiency. Yet, most existing studies on short-selling are based on the US stock market. Shorting in other countries may be subject to a variety of restrictions and can be more expensive. This paper examines shorting activities in 38 major national and regional stock markets for all stocks from 2006 to 2014 in a systematic manner.

By examining multiple indicators of shorting activity, the paper finds that two indicators, days-to-cover ratio and utilization rate, have robust predictive power for future stock returns in the global capital market. Significant cross-country and cross-firm differences are found in the predictive power of alternative short sale measures. Based on a cost-benefit analysis framework for short-sellers, the paper further finds that the predictive power of shorts is stronger in countries with non-prohibitive short sale regulations and for stocks with relatively low liquidity, high shorting fees, and low price efficiency.

This paper is an original contribution to the study of shorting in global equity markets and offers insights for shorting regulation: there is no "one-size-fits-all" shorting regulation, and each market regulator needs to consider the information environment, investor mix, and other factors in making decisions in its own market. Lowering the cost of shorting can improve price efficiency. But if reduced to a very low level, it may lead to the shorting from a large number of uninformed traders, thus reducing price efficiency.

Profile of the Authors

Zhang Xiaoyan

Zhang Xiaoyan, Xinyuan Chair Professor of Finance and Associate Dean at PBC School of Finance, Tsinghua University, Deputy Chair at the National Institute of Financial Research, Deputy Chair at the Institute for Fintech Research, Tsinghua University, and Director of XIN Real Estate FinTech Research Center. 

Zhang Xinran

Zhang Xinran, doctoral student at PBCSF, Tsinghua University, Class of 2015. She was awarded Liu Hongru Special Scholarship of Tsinghua PBCSF in 2019.