The impact of short-selling on market efficiency and liquidity: Evidence from the emerging market of Egypt

Abstract

The purpose of this study is discussing the recent initiative to activate the short-selling mechanism in Egypt, through the issuance of the regulatory decision no. (268) of 2019 on short-selling. Besides, investigating its effect on market efficiency and liquidity according to market participants' perceptions. A questionnaire was formulated to explore the perceptions of academics, financial analysts, and brokers regarding the possible effects of the activation of short-selling mechanism on market efficiency and liquidity. Data were analyzed using descriptive statistics and multiple regression. Results of analyzing the 117 received questionnaires show that short-selling would not improve market efficiency, measured through price discovery and informativeness. However, there is a significant positive relationship between short-selling and financial reporting quality. Moreover, responses show a significant positive relationship between short-selling and market liquidity measured through; trading activity and volume, bid and ask spread, turnover ratio, and reduced market volatility. These findings support the assumption that short-selling could act as a mechanism to improve liquidity even in emerging markets. This study would benefit policymakers, in Egypt and any other countries with similar contexts, and foreign investment decisions. As it is important to investigate the opinion of parties who would be affected by lifting the restrictions on short-selling.