Governance Through Threat: Does Short Selling Improve Internal Governance?
60 Pages Posted: 10 Jul 2013
Date Written: July 9, 2013
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: Suggested Citation