What Drives Short-Selling? Evidence from the Turkish Stock Market
What Drives Short-Selling? Evidence from the Turkish Stock Market

Summary/Abstract: Understanding the factors that influence short selling in a developing economy like the Turkish stock market is crucial for both the effectiveness of the pricing mechanism and the analysis of investor behavior. The present study focus on the motivation underlying short selling behavior in emerging financial market, namely Türkiye, with a focus on trend, overpricing, and arbitrage hypotheses. The present study utilizes one-year lagged cumulative returns to test the trend hypothesis, book-to-market ratios to test the overpricing hypothesis, and beta coefficients to test the arbitrage (or hedging) hypothesis. The study also uses firm size, unsystematic risk, and Amihud’s illiquidity measure as proxies to control for borrowing costs, differences in investors’ opinions, and liquidity, respectively. The results reveal that cumulative return (+), book to market ratio (+), beta (+), company size (+), and illiquidity (-) are significant determinants of short-selling activity. These findings support the arbitrage hypothesis or the hedging motive but do not align with the predictions of the trend and overpricing hypotheses. A positive cumulative return coefficient suggests that short-sellers in the Turkish stock market are contrarian rather than momentum traders, which help prevent overpricing. The result of the book-to-market ratio suggest that short-seller prefer to short stocks at lower price levels rather than higher ones. These findings offer a potential area for further discussion in the literature.

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