Short Selling, Agency, and Corporate Investment
69 Pages Posted: 1 Nov 2014 Last revised: 8 Apr 2020
Date Written: December 2, 2014
How does short selling affect corporate decisions? To answer this question, we examine corporate investment decisions in a model with short selling. We show that high short selling activities can cause firms to overinvest and the agency problems between managers and shareholders are the driver of the overinvestment. Empirically, we find that short interest is positively associated with subsequent corporate investment, and the effect of short-selling activities on investment is stronger when the sensitivity of CEO compensation to stock price performance is greater. The results are not explained by short-sale constraints or firm overvaluation. Additionally, short-selling-induced corporate investments can partly explain the negative relation between both short interest and corporate investment with subsequent stock returns.
Keywords: Short Selling, Agency Problems, Corporate Investment, Stock Returns
JEL Classification: G30, G31
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