The Announcement and Implementation Reaction to China’s Margin Trading and Short Selling Pilot Programme

We examine the impact of China's 2010 margin trading and short selling pilot programme on stock returns and trading volume. The market reacts negatively to both the programme announcement and implementation, with significantly lower returns and trading volumes in the pilot stocks. The negative stock price reaction is anticipated by Miller's (1977) overvaluation hypothesis in the presence of short-sales restrictions. While lower volume is contrary to the developed market empirical evidence, it is consistent with Ausubel's (1990) theory, which implies that uninformed investors reduce their investment in pilot stocks to avoid the risk of trading against informed investors