Was short selling embraced by participants in an emerging market during the COVID-19 pandemic?

Abstract

The COVID-19 pandemic has put the financial system under considerable strain and triggered an unprecedented reaction in the financial market. To promote financial stability and strengthen the Malaysian financial market, the authorities banned regulated short selling activities in March 2020 and subsequently lifted the ban in January 2021. This study objectively examines the stock price reactions toward regulated short selling activities announcements and documents the most recent empirical study which examines the short selling related announcements in the emerging market. There are differing opinions on stock price reactions regarding short selling announcements, so to examine the stock price reactions, the event study methodology was employed. The event window for this study is -15 days, 0 (announcement day), +15 days. Interestingly, the findings showed that the stock prices responded negatively to the ban of regulated short selling activities and responded positively to the removal of the ban. This study supports the downward biased hypothesis which implies that the Malaysian market participants welcome regulated short selling activities.