SHO Time for Innovation: The Real Effects of Short Sellers
University of Georgia - Department of Finance
Indiana University - Kelley School of Business - Department of Finance
June 16, 2016
The 2016 American Finance Association Meetings Paper
We examine the real effect of financial markets by analyzing how short sellers affect firm innovation. Using exogenous variation in short-selling costs generated by a quasi-natural experiment, Regulation SHO, which randomly assigns a subsample of Russell-3000 firms into a pilot program and removes the tick restriction on their stocks, we show that short sellers appear to have a positive, causal effect on the quality, efficiency, and originality of corporate innovation. The exposure to patenting-related litigation initiated by short sellers is a plausible mechanism through which short sellers affect firms’ innovative activities. Our paper provides new insights into an unintended real effect of short sellers – their improvement of technological innovation.
Number of Pages in PDF File: 49
Keywords: Innovation, Short selling, Regulation SHO, Pilot program, Litigation risk
JEL Classification: G14, G18, O31, O32
Date posted: January 18, 2014 ; Last revised: June 19, 2016
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