Investor opinion divergence, short selling reform and stock market performance: evidence from a natural experimenin the Chinese market

This study utilizes the unique institutional setting created by the pilot scheme of lifting the ban on margin buying and short selling in the Chinese A-share market in March 2010. Specifically, this study tests Miller’s (1977) hypothesis and examines the impact of opinion divergence and lifting short-selling constraints on the stock market based on the daily data of 2919 Chinese A-share listed companies from 2008 to 2019. The findings reveal a positive correlation between opinion divergence and stock returns. However, changing short-selling regulations yields mixed results. Increased short selling is associated with higher stock returns and amplifies the positive relationship between opinion divergence and stock returns. Conversely, increased margin trading reduces stock returns, making the positive relationship between divergent opinions and stock returns less pronounced.