The Impact of Short Selling on Stock Price Crash Risk: A Study of Market Conditions

Abstract

As China's capital market continues to evolve, businesses have increasingly acknowledged the significance of the short selling mechanism within its framework. To gain a deeper understanding of its influence, this analysis explores the interplay between the short selling mechanism and the risk of stock price crashes, examining both the market environment and investor behavior. By focusing on Shanghai and Shenzhen A-share listed companies between 2010 and 2021, this study sheds light on the empirical relationship between short selling policies and extreme stock price volatility. Our findings indicate that the implementation of short selling mechanisms contributes to mitigating such volatility. However, it is crucial to note that the efficacy of these mechanisms in reducing the risk of stock price crashes is notably influenced by the market environment. The results highlight the importance of considering market dynamics and investor responses when assessing the role of short selling in the Chinese capital market.