In this paper, we use the natural experiment, the “false vaccine event” happen ing in Changsheng Life Biotechnology Co., Ltd. in the biological vaccine industry, to study whether the margin trading and short selling restriction will have an impact on the stock pricing. We built four different hedge portfolios based on the nature of whether the 22 stocks in the biological vaccine industry could be shorted, and the simulation of portfolio returns was shown three months after the “false vaccine event”. The cumulative return of the portfolio reached a level of 10 % - 20%. Furthermore, based on the adequacy of stock price information content and the timeliness of stock price response to information, this paper constructs an index to measure the pricing efficiency of individual stocks. Through regression analysis, we find that among 22 stocks in the biological vaccine industry, the pricing efficiency of stocks which are allowed to carry out margin trading and short selling business is significantly higher than that of which are not allowed to carry out margin trading and short selling business. Based on the difference of return characteristics and pricing efficiency index of hedge portfolio, this paper shows that margin trading and short selling system can help to correct the mispricing of individual stocks and improve the pricing efficiency of the market.
Efficient market theory holds that in a stock market with a healthy legal system, good functions, high transparency, and full competition, all valuable information has been timely, accurately, and fully reflected in the stock price and their tendency, including the current and future value of the firms. It is impossible for investors to obtain abnormal profits above the market average by analyzing past prices or companies’ basic information, unless there is market manipulation. However, the real stock market is not perfect. When there are a lot of financial frictions that affect the reflection of the real value of the stock price, the stock will be mispriced. Short selling restriction is a common financial friction in the stock market. The introduction of margin financing system in our stock market makes it possible to “buy long” and “short sell”. It can reduce the financial friction of the market and it is helpful to improve the pricing efficiency of stock price in theory. However, some scholars believe that the lifting of the short selling restrictions will exacerbate the tendency when the stock market falls, leading to the misvalue of the stock price. Therefore, from an empirical point of view, it is of great significance to study the impact of the establishment of margin system on the pricing efficiency of China stock market.
In the theory of finance, the theoretical model of the influence of short selling restriction on stock price has been put forward very early. Miller (1977) established a model to point out that investors who are optimistic about the future will choose to buy and hold stocks under the background that investors has heterogeneous expectations and short selling restrictions exist while investors who are pessimistic about the future are unable to participate in the market because of the restrictions on short selling, so they can only choose to leave the market. The stock price cannot fully express the expectations of all market participants, resulting in the stock price deviating from the true value. The more severe the short selling restriction, the more overvalued the stock price, which mainly reflects the information of optimistic investors [
In addition, considering that it may lack of sufficiency to analyze the effect of margin financing on stock pricing efficiency simply from the perspective of hedge portfolio income, this paper constructs the index of stock price volatility (PSF) and the index of stock price lag (PL) to measure pricing efficiency from two dimensions which are the content of price heterogeneity information and reaction speed of stock price to information and then analyzes the influence of margin financing system on pricing efficiency of individual stock. In summary, this paper will provide empirical evidence to demonstrate the impact of margin trading and short selling system on the efficiency of stock pricing from the two angles of hedge portfolio income and the significance of margin trading and short selling system variables.
The main contributions of this paper are as follows: on the one hand, considering that there are few papers in China to study the effect of margin financing on stock pricing efficiency through the perspective of hedge portfolio construction, this paper selects “false vaccine event” happened in Changsheng Life Biotechnology Co., Ltd. as an external event shock, defines the listed company in the biological vaccine industry as two groups according to the margin trading and short selling system: the short-selling group and the non-short-selling group, constructs the hedge portfolio by buying the stock portfolio that cannot be short and shorting the stock that is allowed to short, and examines the yield and risk changes of the hedge portfolio under the impact of the “false vaccine” event. This paper studies the influence of margin trading and short selling system on stock pricing efficiency through the return and risk of portfolio, which enriches the relevant research of margin and short margin system in China. On the other hand, referring to the definition of stock heterogeneity information by Liu Shancun (2018) in [
The “unqualified vaccine” event of Changsheng Life Biotechnology Co., Ltd. has had an important external impact on the biological vaccine industry, and there are both margin and non-margin stocks in the industry. The “false vaccine event” in this industry provides an ideal background for this paper to study the impact of margin financing on stock pricing efficiency.
On July 15, 2018, the State Drug Administration issued a circular that the State Drug Administration carries out an unannouncement inspection on the production field of Changsheng Life Biotechnology Co., Ltd. Inspection team found that Changsheng Life Biotechnology Co., Ltd. made false record in the production process of rabies vaccine (Verocell) for human use and had other serious violations of the Drug production quality Management Standard (GMP). According to the inspection results, the State Drug Administration ordered Food and Drug Administration in Jilin to take back the Drug GMP Certificate from Changsheng Life Biotechnology Co., Ltd., and requested Changsheng Life Biotechnology Co., Ltd. to stop all rabies vaccine production.
The “false vaccine event” has had an important impact on the stock prices of listed companies in the biological vaccine industry. After the news that the illegal production of rabies vaccine was filed and investigated, Changsheng Life Biotechnology Co., Ltd.’s share price fell to limit for 32 trading days in a row, and the biological vaccine industry suffered a severe setback. However, except for the fact that the culprit was most affected, the “unqualified vaccine incident” had different effects on the various listed companies in the biological vaccine industry. Miller (1977) in [
In this paper, the stock price data and financial data of the companies come from the CSMAR database. This paper selects the listed companies of the biological vaccine industry as the research samples. The sample range is from April 15, 2018 to October 15, 2018, covering all trading sessions. According to the Industry Classification of listed companies published by the China Securities Regulatory Commission, the biological vaccine industry contains twenty-two listed companies. These twenty-two listed companies are divided into two groups which are short selling group and non-short selling group, according to whether they are allowed to carry out margin financing and short selling business. According to the current listing of companies on the market, the biological vaccine industry includes stocks of twelve listed companies allowed to carry out margin trading and short selling business. They are Changchun High & New Technology Industrials (Group) Inc., Chengdu Taihe Health Technology Group Inc., Ltd., Hualan Bio-Technology Group Inc., Ltd., Shuanglu Pharmaceutical Group Inc., Ltd., Tianjin Lisheng Pharmaceutical Group Inc., Ltd., Chongqing Zhifei Biological Products Co., Ltd., Fosun Pharmaceutical Group Inc., Ltd., Jinyu Bio-technology Co., Ltd., Guangzhou Baiyunshan Pharmaceutical Holdings Co., Ltd., Zhejiang Conba Pharmaceutical Co., Ltd., Liaoning Chengdu Co., Ltd., Shanghai Haixin Group Co., Ltd. And the other stocks of ten listed companies are currently not allowed to carry out margin trading and short selling business. They are Beijing Four Rings Biopharmaceutical Co., Ltd., Yueyang Xingchang Petrochemical Co., Ltd., Guangji Pharmaceutical Group Inc., Ltd., Sinobioway Group Co., Ltd., Changsheng Life Biotechnology Co., Ltd., Walvax Biotechnology Co., Ltd., Boya Bio-pharmaceutical Co., Ltd., Shenzhen Kangtai Biological Products Co., Ltd., Yabao Pharmaceutical Group Inc., Ltd., Huabei Pharmaceutical Group Inc., Ltd. These 10 stocks are defined as the non-short-selling group in this paper.
Based on the definitions above about short-selling group and non-short-selling group, four different hedge portfolios are constructed. The first type of portfolio (defined as Strategy A) is to buy 10 stocks in the non-short-selling group with the same weight, that is, to buy non-short groups, and to short selling 12 stocks that are allowed to short, that is, short selling groups. Considering that the “false vaccine event” is directed at Changsheng Life Biotechnology Co., Ltd., the event could have a significant impact on Changsheng Life Biotechnology Co., Ltd.’s stock price. In order to control this particular effect, this paper constructs a second portfolio (defined as the strategy of B), to buy nine stocks which cannot be short excluding Changsheng Life Biotechnology Co., Ltd. with the same weight, and to short the stocks of the group of short selling with equal weight at the same time. Considering that the market capitalization factor of the stock may cause asymmetric effects of the “false vaccine event” on different stocks, the third portfolio (defined as the strategy C), is constructed in this paper excluding Fosun Pharmaceutical Group Inc., Ltd., the largest company by market capitalization in the biological vaccine industry, that is to buy 10 stocks that cannot be short by weight, and shorten the shares that can be sold short excluding Fosun Pharmaceutical Group Inc., Ltd. Finally, the fourth portfolio (defined as Strategy D) excludes both Changsheng Life Biotechnology Co., Ltd. and Fosun Pharmaceutical Group Inc., Ltd., and buys stocks that cannot be shorted after Changsheng Life Biotechnology Co., Ltd. is excluded in the same weight. At the same time short selling the same weight of the short-selling group by excluding Fosun Pharmaceutical Group Inc., Ltd.
The changes in returns of hedge portfolios A, B, C and D before and after the “false vaccine event” are shown in
As can be seen from
strategies continued to rise significantly, and the cumulative return rate of the portfolio reached 10% - 20% three months after the “false vaccine event”. The result shows that the “false vaccine event” has an important impact on the stock price of the listed companies in the biological vaccine industry in China, and the impact of the event on the stock price depends on whether the stock can be short sold. A hedge investment portfolio based on the biological vaccine industry in this paper can produce significant benefits after the “false vaccine event”, which is similar to Li Ke, Xu Longbing and Zhu Weihua (2014) building hedge portfolios based on the liquor industry and producing positive return after the plasticizer event [
This paper argues that the reason why the four hedging strategies can gain significant profits after the “false vaccine event” is that the shares that cannot be short are overvalued because of the short selling restriction compared to the stocks that can be shorted. However, limited in the perspective of portfolio returns, it is clear that margin trading and short selling affects the pricing efficiency of stocks is not convincing enough, so this paper manage to measure the efficiency of stock pricing.
1The shadow area represents the five trading days before and after the false vaccine event. The data source is CSMAR database.
In order to test whether margin trading and short selling system has an impact on the pricing efficiency of stocks, referring to Li Zhisheng, Chen, Lin Bingxuan (2015) in [
Efficiency i = α 0 + β × Short_List i + γ × Controls i + ε i (1)
where the explained variable Efficiency i represents the pricing efficiency of the stock i during the sample period, the explanatory variable Short_List i is a dummy variable, when the stock i is the subject of margin trading and short selling system during the sample period, the value is 1, otherwise the value is zero. Controls i denotes the control variable corresponding to the stock i, and ε i is a random perturbation term. If the regression coefficient of dummy variable Short_List i is significantly positive, it shows that the pricing efficiency of stocks with margin trading and short selling is higher than that without it. If the regression coefficient of Short_List i is significantly negative, the pricing efficiency of stock which is not allowed to sell short is higher than that of stock with margin trading. If the regression coefficient of Short_List i is not significant, it shows that there is no significant difference in pricing efficiency between margin trading and short selling stocks and non-short-selling stocks, that is, margin trading will not have a significant impact on the pricing efficiency of stocks.
This paper will investigate the pricing efficiency of stock from two angles: the information adequacy of stock price and the response timeliness of stock price information, and establish the index (PSF), the stock price idiosyncratic fluctuation and the lag of price response index (PLR), which is used to investigate the stock pricing efficiency respectively.
The heterogeneity information of stock refers to the information that affects the stock price except market information and industry information. Referring to Liu Shancun (2018)’s idea in [
r j , t = α j + β j , 1 r m , t + β j , 2 r m , t − 1 + β j , 3 r i , t + β j , 4 r i , t − 1 + ε j , t (2)
Among them, r j , t represents the stock return rate of the company j at time t, r m , t represents the return rate of market index at time t, r i , t represents the industry return rate of the industry i in time t, and ε j , t is a stochastic disturbance. By the regression of the model above, the residual term e j , t is obtained. The residual term e j , t can reflect the heterogeneity information of the company j. In this paper, the standard deviation of the residual term e j , t is defined as volatility of stock price which is PSF, that is, for a company j, the index of volatility of stock price is PSF j . The greater value of the index, the larger the fluctuation range of the content of the stock price contains the heterogeneity information, which means the less sufficient the stock price containing all kinds of information, and the lower the pricing efficiency is.
This paper refers to the adjustment speed of asset price to market information proposed by Saffi and Sigurdsson in [
r j , t = α j + β j × r m , t + ∑ n = 1 4 δ j , n × r m , t − n + ε j , t (3)
where r j , t represents the stock return rate of the company j at time t, r m , t represents the return rate of market index at time t, r m , t − n represents the yield of the market index with lag n. By regression to the model above, the determinable coefficient R2 of regression is obtained, and then, by constraining the coefficient of return of all lagging markets is 0, the determinable coefficient R ′ 2 of constraint regression is obtained.
Therefore, the first price lag response index can be constructed:
PLR 1 , j = 1 − R ′ 2 R 2 (4)
PLR 1 , j captures the ratio of return on a single asset explained by the lagging market rate of return. The smaller the PLR 1 , j value, the less dependent the rate of return on the past market information, which also means the faster the asset absorbs market information, the higher the pricing efficiency. In addition to the determinable coefficient of regression equation, this paper also uses the coefficient size of the explanatory variable in the regression equation to measure the dependence of the return rate on the lagging market rate of return, and thus obtains the second lag response index:
PLR 2 , j = ∑ n = 1 4 | δ j , n | | β j | + ∑ n = 1 4 | δ j , n | (5)
PLR 2 , j captures the proportion of the return coefficient of the lagging market in Equation (2) in all regression coefficients. The smaller the value is, the higher the pricing efficiency of the stock is.
There are two stock exchanges in China, namely Shanghai Stock Exchange and Shenzhen Stock Exchange. Although the stocks in the two exchanges face the same economic and market environment and are subject to the same supervision, there are some differences between the two exchanges in terms of the issuance system, the information disclosure system, the composition of investors, etc. This paper believes that these factors may have a systematic impact on the pricing of stocks. We define the exchange dummy variable of individual stock i as Exchange i . When the stock comes from the Shanghai Stock Exchange, the value is 1, and when the stock comes from the Shenzhen Stock Exchange, the value is 0.
Fama and French (1993) found that the ratio of book to market value is the key factor to affect the stock price, which will have an important impact on the pricing efficiency of the stock [
According to Sadka and Scherbina (2007) in [
Considering that investors involved in margin trading and short selling need to borrow funds or securities from securities brokers as the supply side of funds or securities and investors as the demand side, whether there is a conflict of interest between the two party may also affect the effect of margin trading and short selling on stock pricing efficiency. For example, when investors need to borrow stocks and sell short, if the stock is a component of the broker’s proprietary portfolio, the broker does not want investors to sell too much short securities; Instead, when investors want to buy stocks that are a component of a broker’s proprietary portfolio, broker are willing to make it easier for investors to finance trading. Based on this, this paper takes the percentage of broker holding stock in the last quarter of the sample period as the control variable of the model.
We choose the CSI 300 Index as the market index. Based on the stock data of CSI 300 Index and the biological vaccine industry from April 15, 2018 to October 15, 2018, the descriptive statistics of the main variables are calculated in
As we can be seen from
Variable | Mean | Std. Dev. | Coef. Var | Min | Max |
---|---|---|---|---|---|
psf | 0.0214 | 0.0064 | 0.2991 | 0.0117 | 0.0335 |
p l r 1 | 0.1281 | 0.0976 | 0.7619 | 0.0167 | 0.3372 |
p l r 2 | 0.3759 | 0.1183 | 0.3147 | 0.1883 | 0.5811 |
Variable | psf | p l r 1 | p l r 2 |
---|---|---|---|
psf | 1.0000 | 0.2614 | 0.2578 |
(0.2400) | (0.2467) | ||
p l r 1 | 0.2614 | 1.0000 | 0.9548 |
(0.2400) | (0.0000) | ||
p l r 2 | 0.2578 | 0.9548 | 1.0000 |
(0.2467) | (0.0000) |
Note: The number of brackets in Panel B represents the p value corresponding to the significance test of the correlation coefficient. The data comes from CSMAR database.
Variable | psf | p l r 1 | p l r 2 |
---|---|---|---|
Intercept | 1.606 | 0.144 | 0.435 |
(0.201) | (0.031) | (0.036) | |
[0.000] | [0.000] | [0.000] | |
Short_List | −0.282 | −0.070 | −0.095 |
(0.123) | (0.026) | (0.033) | |
[0.036] | [0.016] | [0.011] | |
Exchange | −0.037 | −0.096 | −0.114 |
(0.180) | (0.021) | (0.028) | |
[0.842] | [0.000] | [0.001] | |
B/M | −0.432 | −0.068 | −0.087 |
(0.314) | (0.052) | (0.065) | |
[0.188] | [0.214] | [0.200] | |
Turnover | 0.415 | 1.272 | 0.701 |
(0.048) | (1.327) | (1.787) | |
[0.000] | [0.352] | [0.700] | |
Broker | 0.028 | 0.743 | 0.665 |
(0.010) | (0.134) | (0.214) | |
[0.012] | [0.000] | [0.007] | |
R-Square | 0.832 | 0.732 | 0.684 |
Note: The numbers in parentheses represent heteroscedasticity autocorrelation robust standard errors (HAC) and the numbers in square brackets represent the p values corresponding to the significance test of the estimation coefficients. The data source is CSMAR database.
Based on the background that the four hedge investment strategies on the biological vaccine industry constructed in this paper can make significant profits after the “false vaccine event”, this paper attempts to construct a pricing efficiency index from two angles: the adequacy of stock price information content and the timeliness of stock price response to information. This paper studies whether there is a significant difference in pricing efficiency between margin trading and short selling system and non-margin-trading-and-short-selling system in a basket of stocks in the biological vaccine industry. In this paper, the regression model (1) is estimated, and the corresponding regression results are shown in
From
About adequacy of information on stock prices, in addition to the proxy variable of margin trading and short selling system, Short_List, has a significant impact on the index of volatility of stock price (psf), the paper finds that the turnover rate (Turnover) and the percentage of broker holding stocks in the recent quarter (Broker) are also important factors affecting psf. Specifically, the lower the stock turnover rate is and the lower the stockholding ratio is, the smaller the specific volatility index of the stock price is and the more sufficient the information content in the stock price is, thus the higher the pricing efficiency is. These findings are consistent with those of Li Zhisheng, Du Shuang, Lin Bingxuan (2015) in [
About the timeliness of the stock price response to information, in addition to the proxy variable Short_List of margin trading and short selling system which has significant influence on the index of price lag response p l r 1 & p l r 2 , this paper finds that the stock exchange (Exchange) which the stock is located in and the percentage of broker holding stocks in the recent quarter (Broker) are also important factors affecting p l r 1 and p l r 2 . Specifically, stocks in Shanghai Stock Exchange whose stock price response to information is significantly higher than those in Shenzhen Stock Exchange. In addition, the lower the percentage of broker holding stocks in the recent quarter, the higher the timeliness of stock price response to information and the higher the pricing efficiency, which is consistent with the adequacy effect of Broker on the information content of stock price. In addition, it can be seen from
In this paper, twenty-two stocks in the biological vaccine industry in China are taken as the samples. Through simulating the return of hedge portfolios and constructing the pricing efficiency index, we study the effect of margin trading and short selling on the pricing efficiency of stocks in China. We found that firstly, using the “false vaccine event” happening in Changsheng Life Biotechnology Co., Ltd. as the driving event, we constructed hedge portfolios based on the strategy of A, B, C and D and found that all portfolios have significant returns after the event; Secondly, we established the pricing efficiency indexes psf, p l r 1 and p l r 2 from the adequacy of stock price information and the timeliness of stock price response to information. It is found that the pricing efficiency of the stocks which are allowed to margin trading and short selling business is significantly higher than that of stocks which are not allowed to sell short. This result may explain why the hedge portfolios we construct have positive return. The “false vaccine incident” has a more far-reaching impact on the stocks that can be shorted. The stock that is allowed to sell short can reflect the negative information more fully; its fall range will be bigger than that cannot be sold short.
The result in this paper provides evidence from developing countries for the conclusion that margin trading and short selling system is conducive to improving the pricing efficiency of individual stocks and improving the quality of the stock market. We believe that China’s regulators should take further measures to reduce the barriers and transaction costs of margin trading, and gradually expand the number of stocks that are allowed to sell short in order to promote the healthy development of our stock market.
The author declares no conflicts of interest regarding the publication of this paper.
Huang, L.J. (2019) The Influence of Margin Trading and Short Selling on the Price Efficiency of China’s Stock Market―Based on Portfolio Perspective. American Journal of Industrial and Business Management, 9, 49-62. https://doi.org/10.4236/ajibm.2019.91004