Short Selling, Agency, and Corporate Investment

69 Pages Posted: 1 Nov 2014 Last revised: 8 Apr 2020

See all articles by Pedram Nezafat

Pedram Nezafat

University of Michigan at Ann Arbor - Finance

Tao Shen

Tsinghua University

Qinghai Wang

University of Central Florida - College of Business Administration

Date Written: December 2, 2014

Abstract

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

Suggested Citation

Nezafat, Pedram and Shen, Tao and Wang, Qinghai, Short Selling, Agency, and Corporate Investment (December 2, 2014). Available at SSRN: https://ssrn.com/abstract=2517148 or http://dx.doi.org/10.2139/ssrn.2517148

Pedram Nezafat (Contact Author)

University of Michigan at Ann Arbor - Finance ( email )

701 Tappan Street
Ann Arbor, MI 48109-1234
United States

Tao Shen

Tsinghua University ( email )

Department of Finance
School of Economics and Management
China

Qinghai Wang

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

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