A Comparative Study on the Information Effect of Stock Lending and Borrowing and Short Selling between the Korea Stock Exchange and the New Stock Exchange

Abstract

The purpose of this study is to compare the information effect of Stock Lending and Borrowing (SLB) and short selling between the Korea Stock Exchange (KRX) and the New York Stock Exchange (NYSE). While most previous studies analyzed the information effect with a focus on short selling, this study links short selling to SLB and examines how SLB and short selling affect stock prices. Using the data of 40 stocks with the most active records of SLB and short selling from each exchange, we perform a regression analysis to examine the information effect. We find that in the KRX, SLB has a positive effect on short selling and short selling has a negative effect on stock prices. However, in the NYSE, short selling has a significant positive effect on stock prices. This is due to the differences in policies concerning public posting of short selling data. We also find that the effect of volatility on stock prices and the effect of short selling on volatility are all significantly negative in both exchanges. That is, short selling reduces market volatility and thus keeps the market from overheating. Furthermore, the effects are greater during the periods when SLB and short selling are more concentrated.