Are Net Short Position Publications, Enforced by the EU Short Selling Regulation, Followed by Abnormal Returns? Evidence from the Helsinki Stock Exchange
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School of Business |
Master's thesis
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Date
2020
Department
Major/Subject
Mcode
Degree programme
Finance
Language
en
Pages
42 + 10
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Abstract
Purpose of the study In 2012, after the global financial crisis had rattled the markets and driven economies around the world to recession, EU set an EU short selling regulation with the aim of creating a unified, common regulatory framework in the EU for dealing with short selling issues. The set regulation strongly addressed issues related to the transparency of markets and net short positions held by position holders. Information and publication requirements were put in place and the net short position information came available to market participants. It has been suggested that public disclosure requirements may contribute to herding behaviour and increase the magnitude of downward price spirals. This is contrary to the purpose of the regulation. The objective of this paper is to discuss the background and implementation of the EU short selling regulation, as well as empirically study the possible relationship between the enforced net short position publications and possible following abnormal stock returns, providing evidence through Helsinki stock exchange. Data and methodology Three types of data are used in this study, which are stock-specific net short position (NSP) publications, daily stock closing prices and reference market index data (OMX Helsinki All-Share Index, OMXHPI). Additionally, position holders’ assets under management are utilized as a proxy for position holder reputation. The dataset extends from the inception of the publication data in November 2012 to December 2019. NSP publications are retrieved from the Finnish national competent authority’s (Finnish Financial Supervisory Authority) website. Daily stock price data and reference market index data are retrieved from Thomson Reuters Eikon. Event study methodology is used for studying the abnormal returns following the NSP publications. The cumulative average abnormal returns are calculated over several different event windows. Findings Overall, the results are inconsistent, and no strong evidence can be found on the inverse relationship between increased (reduced) net short positions and negative (positive) post-event abnormal returns. Even after dividing the NSP publications into quartiles, based on the magnitude of change in a position, the results remain largely unchanged. However, some statistically significant evidence is found that the NSP reductions made by the most reputable position holders are followed by positive cumulative average abnormal returns on all three event windows ( [0,+1], [0,+2] and [0,+3] ). The cumulative average abnormal returns following the publications are 0,26%, 0,18% and 0,44% respectively. This implies that larger and more reputable position holders might be mimicked by other investors. However, after conducting a regression analysis using the derived [0,+3] CARs as the dependent variable and position holder AUM as well as the stock’s market capitalization, leverage and liquidity as independent variables, the coefficient for AUM remains positive but insignificant. Thus, no conclusive results are obtained from the empirical study.Description
Thesis advisor
Torstila, SamiKeywords
EU short selling regulation, short selling, event study, abnormal return