Adverse Selection of Margin Trading and Short Selling: Evidence from Retail Investor Participation
Prof. Baohua XIN
Associate Professor of Accounting, Joseph L. Rotman School of Management, University of Toronto
Date: 9 May 2025 (Friday)
Time: 10:00 – 11:30
Venue: E22-G015
Host: Prof. Feng TANG, Assistant Professor in Accounting
Abstract
We examine the impact of margin trading and short selling on the trading behavior of small retail investors. Using a unique setting that introduces, at different times, margin trading and short selling for a selected group of securities (pilot stocks) in an economy characterized by heavy retail investor participation and a relatively weak information environment, we document that pilot stocks experience a significant decline in small retail trading. This decline is more pronounced among pilot stocks with higher levels of information asymmetry. Furthermore, we show that the shift in small retail investor participation, induced by margin trading and short selling, contributes to a deterioration in the market quality of pilot stocks. Our results provide empirical support for classical adverse selection theories of informed trading (e.g., Glosten and Milgrom, 1985, Easley and O’hara, 2004).
Speaker
Baohua Xin is an Associate Professor of Accounting at the University of Toronto’s Rotman School of Management. He served as the Accounting PhD Program Coordinator from 2018 to 2024 and chaired the Rotman PhD Program Committee from 2022 to 2024. His research focuses on information economics and capital markets, employing a combination of analytical, archival, and experimental methods. Baohua Xin’s work has been published in accounting, management, and economic journals, including Journal of Accounting Research, The Accounting Review, Contemporary Accounting Research, Review of Accounting Studies, Management Science, Journal of Economic Behavior and Organization, and Journal of Economic Dynamics and Control. His currently serves on the editorial board of Contemporary Accounting Research and as an editor for The International Journal of Accounting.
All are welcome!
