Short‐sellers at home and abroad: Their respective roles in the price discovery of cross‐listed firms

• Published date: 01 September 2021
• Author: Jun Chen,Alireza Tourani‐Rad,Ju Xiang,Ting Yang
• Date: 01 September 2021
• DOI: http://doi.org/10.1111/irfi.12317

ORIGINAL ARTICLE

Short-sellers at home and abroad: Their respective

roles in the price discovery of cross-listed firms

Jun Chen

1

| Alireza Tourani-Rad

1

| Ju Xiang

2

| Ting Yang

1

1

Department of Finance, Auckland University

of Technology, Auckland, New Zealand

2

Finance Department, School of Business,

Southern University of Science and

Technology, Shenzhen, China

Correspondence

Ting Yang, Department of Finance, Auckland

University of Technology, Private Bag 92006,

Auckland 1142, New Zealand.

Email: ting.yang@aut.ac.nz

Abstract

We examine the respective role of short selling in both the

home and the host market in the price discovery of main-

land Chinese firms cross-listed in Hong Kong. We find that

short-sellers of A-shares in mainland China contribute sig-

nificantly more to the price discovery than short-sellers of

corresponding H-shares in Hong Kong, and the latter group

benefits from the presence of the former group but not the

other way around. Short-sellers in mainland China promptly

react to the arrival of negative news, while short-sellers in

Hong Kong do not react to such news, and tend to follow

their counterparts in mainland China. We posit that the

institutional differences in short selling between the two

markets possibly explain the findings.

KEYWORDS

cross-listing, news, price discovery, short selling

JEL CLASSIFICATION

G12; G14; G15

1|INTRODUCTION

Price discovery is one of the principal functions of the financial market. When the trading of a stock extends beyond

a single market,each of the markets involvedmay have unequal contributionto the determination ofthe efficient stock

price. Comprehensive studies on thistopic originate from Hasbrouck (1995), who examines the proportional contribu-

tion (informationshare) of NYSE, NASDAQ, and the regionalexchanges to the price discovery of the30 stocks in the

Dow Jones Industrial Average index. Other than trading at multiple exchanges in the same country, an increasingly

large numberof firms list their stocks also in a foreignmarket, which generatessubstantial academic interest.

1

Received: 23 April 2018 Revised: 6 March 2020 Accepted: 15 May 2020

DOI: 10.1111/irfi.12317

© 2020 International Review of Finance Ltd. 2020

International Review of Finance. 2021;21:1013–1038. wileyonlinelibrary.com/journal/irfi 1013

Notwithstanding the voluminous literature on the price discovery of cross-listed stocks, we are unaware of any

study that examines whether and how the short selling of a cross-listed stock on its home exchange and the short

selling of the stock on its host (foreign) exchange affect the respective contribution of the two exchanges to the

price discovery of the stock. Price discovery process is carried out by all market participants, among which short-

sellers are an important group. Moreover, most empirical studies on short selling of stocks traded in a single market

establish that short selling improves price discovery (see, e.g., Boehmer & Wu, 2013; Bris, Goetzmann, & Zhu, 2007;

Engelberg, Reed, & Ringgenberg, 2012, among many others). Does only the shorting selling in the home market

improve the price discovery, because the home market is where news on the firm originates from and possesses an

information advantage? Or does short selling in the host market also facilitate the price discovery, because of per-

haps better market infrastructure and more sophisticated short-sellers? If short selling in both markets is beneficial,

what is their relative importance? These are important questions not yet answered in the literature.

The first part of this article attempts to fill this gap. Using a sample of Chinese firms cross-listed in mainland

China (on either Shanghai or Shenzhen Stock Exchanges) and Hong Kong, we investigate whether there is any rela-

tion and, if so, what the relation is between the short selling of these firms in mainland China and Hong Kong and

the share of price discovery captured by these two markets. We find that short selling in both mainland China and

Hong Kong improves the price discovery; the short selling in mainland China contributes significantly more than the

short selling in Hong Kong to the price discovery; and there is an interesting asymmetric feedback between short

selling in the two markets: Short selling in Hong Kong benefits (in terms of capturing a higher share of price discov-

ery) from the presence of short selling in mainland China, but not the other way around.

The second part of the article examines what drives the short selling in mainland China and Hong Kong in order

to identify a possible channel through which short-sellers in mainland China play a larger role in the price discovery

of cross-listed firms. We test three groups of explanatory variables in our regressions. First, stock-specific and

market-wide trading characteristics such as lagged return, market cap, turnover, spread, and volatility are included.

Second, to investigate the interaction between short selling in the two markets, in the regressions where short selling

in mainland China (in Hong Kong) is the dependent variable, we include short selling in Hong Kong (in mainland

China) as an explanatory variable. Third, the number of all types of negative news is included. We find that short-

sellers in these two markets behave differently: their short selling often shows different relations with stock and

market trading characteristics; short selling turnover in mainland China has significant explanatory power for short

selling turnover in Hong Kong, but not the other way around; and short-sellers in mainland China react to the arrival

of negative news quickly and in the correct direction, while short-sellers in Hong Kong do not.

These results indicate that short-sellers in mainland China contribute more to the price discovery of cross-listed

firms by better facilitating the incorporation of relevant negative news into stock prices. After identifying this possi-

ble channel through which short-sellers in mainland China plays a more important role, we proceed further to discuss

the possible explanations for each of our main empirical findings. In particular, why is the short selling of H-shares

not significantly related to the arrival of negative news? What are the possible sources of comparative advantage for

mainland short-sellers? And why do short-sellers in Hong Kong tend to follow short-sellers in mainland China? We

posit that the institutional differences in short selling between Hong Kong and mainland China provide possible

answers to these questions.

2

Many studies have explored the determinants of short selling (see, e.g., Kot, 2007). To the best of our knowl-

edge, we are the first to investigate the determinants of the short selling of cross-listed stocks in both the home and

the host market. A strand of short selling literature examines how short-sellers react to news. Most of such studies

are on a specific type of news (see, e.g., Christophe, Ferri, and Angel (2004) for earnings announcements; Christophe,

Ferri, and Hsieh (2010) for analyst downgrades). An exception is Engelberg et al. (2012), who examine how short-

sellers trade around all types of corporate news for the U.S. market. Our study also includes all types of news and

therefore complements Engelberg et al. (2012) by offering evidence from non-U.S. markets.

Two papers are related to our study. Blau, Van Ness, and Warr (2012) and Brockman and Hao (2011) compare

the short selling in the United States of American Depositary Receipts (ADRs) of two groups of cross-listed firms:

1014 CHEN ET AL.