Shorting flows and return predictability in Taiwan

Wang et al. (2020) show that short- and long-term shorting flows are strong predictors of future stock returns in the U.S. markets during 2010–2015. Their results are in line with the informed shorting hypothesis that short sellers trade on long-term information that is gradually incorporated into s...

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Bibliographic Details
Published in:Pacific-Basin finance journal 2023-02, Vol.77, p.101816, Article 101816
Main Authors: Lin, Chaonan, Ho, Hsiao-Wei, Ko, Kuan-Cheng
Format: Article
Language:English
Subjects:
Real-time disclosure
Return predictability
Short sale
Shorting flow
Taiwan stock market
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Summary:Wang et al. (2020) show that short- and long-term shorting flows are strong predictors of future stock returns in the U.S. markets during 2010–2015. Their results are in line with the informed shorting hypothesis that short sellers trade on long-term information that is gradually incorporated into stock prices. This study extends Wang et al.'s (2020) analyses to the Taiwan stock market by proposing that the impositions of the up-tick rule and price limits provide an ideal setting to test the informed shorting hypothesis. We show that short- and long-term shorting flows have strong predictive power for future stock returns in Taiwan, suggesting that short sellers' trading does contain significant incremental information about future stock returns under the restrictions of the up-tick rule and price limits. •We examine whether shorting flow is a useful predictor of future stock returns in Taiwan.•The Taiwan stock market imposes the up-tick rule and price limits.•The two regulations provide an ideal setting to test the informed shorting hypothesis.•Short- and long-term shorting flows both predict future stock returns with significance in Taiwan.
ISSN:0927-538X
1879-0585
DOI:10.1016/j.pacfin.2022.101816