Governance Through Threat: Does Short Selling Improve Internal Governance?

60 Pages Posted: 10 Jul 2013

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Hong Zhang

Tsinghua University - PBC School of Finance

Date Written: July 9, 2013

Abstract

We explore the relationship between internal governance and the disciplining mechanisms created by the threat of short selling (i.e. “short-selling potential”). We argue that the presence of short selling increases the cost of agency problems for shareholders and incentivizes them to improve internal governance. Our stock-level tests across 23 developed countries during 2003-2009 confirm that the threat of short selling significantly enhances the quality of internal governance. This effect is stronger for financially constrained firms and more pronounced in countries with weak institutional environments. The governance impact of short selling leads to an improvement in firms’ operating performance.

Keywords: short selling, international finance, corporate governance, equity incentives

JEL Classification: G30, M41

Suggested Citation

Massa, Massimo and Zhang, Bohui and Zhang, Hong, Governance Through Threat: Does Short Selling Improve Internal Governance? (July 9, 2013). INSEAD Working Paper No. 2013/83/FIN. Available at SSRN: https://ssrn.com/abstract=2291474 or http://dx.doi.org/10.2139/ssrn.2291474

Massimo Massa

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France
+33 1 6072 4481 (Phone)
+33 1 6072 4045 (Fax)

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen ( email )

Hong Zhang (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

HOME PAGE: http://eng.pbcsf.tsinghua.edu.cn/content/details167_7995_x.html

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