Do foreign short-sellers predict stock returns? Evidence from daily short-selling in Korean stock market

•About 88% of short sale trading is performed by foreign investors in Korea.•Short-selling is increased for stocks with high past cumulative returns.•Increased short-selling predicts future decline of return of a shorted stock.•Short-selling by foreign investors does not improve stock liquidity.•Short-selling by foreign investors does not increase return volatility.

We investigate the daily short-selling by foreign investors and their impact on stock price, liquidity, and volatility in the Korean stock market. From January 1, 2006, to May 31, 2010, we find that the majority of short-selling is performed by foreign, rather than by domestic, investors and that foreign short-sellers are contrarians, whose large short-selling predicts short-run future return. We also find that foreign investors' short-selling is performed when buying-pressure is high, but does not improve stock liquidity. Furthermore, we find that foreign investors' short-selling does not increase volatility, providing evidence against the foreign investors' destabilizing role in emerging markets.