Does Short Selling Increase Speculation? Evidence from the Chinese Stock Market

Using difference-in-differences method, this paper examines the effect of the introduction of short selling in the Chinese stock market on the speculative trading of underlying stocks and makes a further exploration of the cause from the perspective of the changes in shareholder structure. It is found that speculative trading of underlying stocks is significantly decreased after short selling is introduced, and the speculation of stocks with low market value and low idiosyncratic volatility is increased more than those with high market value and high idiosyncratic volatility. Leaving the short selling markets of some small and institutional investors, who prefer to speculative trading, are able to partially and well explain these study results.