Impact of High-Intensity Short-Selling Regulations on the Korean Stock Market: Focus on Liquidity, Price Valuation, Information Efficiency, and Market Stability

This study investigates the impact of high-intensity short-selling regulations on the Korean stock market during the COVID-19 pandemic. Focusing on four key market aspects—liquidity, price valuation, information efficiency, and market stability—the analysis compares pre-ban and ban periods using data from all KOSPI and KOSDAQ listed stocks. Contrary to conventional concerns, market liquidity improved after the short-selling ban, largely due to increased retail investor participation. However, stock prices-particularly those with previously high short-selling activity—tended to be overvalued during the ban period, as reflected in rising PER and PBR levels. Regarding information efficiency, the post-earnings announcement drift (PEAD) did not show clear signs of mitigation through short-selling, nor did the ban significantly hinder negative information reflection. On market stability, the short-selling ban contributed to more frequent recovery or overshooting patterns after abnormal price plunges, implying a stabilizing effect. These findings suggest that while the ban fostered short-term market stability and liquidity, it also raised the risk of valuation bubbles. The results offer important policy implications for financial regulators when balancing market efficiency with investor protection during periods of heightened uncertainty.