Are Short Sellers Informed Traders?: Focus on the Impact of Tax Avoidance Information on Short Selling

Short selling, in Korean, has both positive and negative sides. On the positive side, it can help balance the information about a company in the stock market, making it more efficient and preventing stock prices from rising too much. This ensures that stock prices stay reasonable. On the negative side, it could lead to a situation where stock prices drop too much, causing problems in the market. Moreover, there’s a concern that individual investors might find it harder to participate compared to big institutional or foreign investors, making the process less fair for everyone. Our study aims to figure out if short sellers use information about a company’s tax practices to make their trades. If they do, it could mean they are helping to make the market more efficient by reducing information imbalances. Our research results show that there is a positive connection between a company’s tax practices and the amount of short selling happening (both in terms of how much is traded and the value of those trades). This suggests that short sellers are indeed using information about a company’s tax practices, which is contributing to making the market work better. Considering the ongoing debates about whether short selling is good or bad, it might be more useful to focus on making sure short selling is done correctly instead of completely getting rid of it. This could involve investigating and punishing illegal short selling, and giving more opportunities for regular people to take part in short selling. This approach takes into account short selling’s potential to make the market work better by reducing information imbalances and suggests that making it work better might be more helpful than just getting rid of it.