Saving Long-Term Investment from Short-Termism: The Surprising Role of Short Selling

42 Pages Posted: 14 Feb 2015

See all articles by Massimo Massa

Massimo Massa

INSEAD - Finance

Fei Wu

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF)

Hong Zhang

Tsinghua University - PBC School of Finance

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen

Multiple version iconThere are 2 versions of this paper

Date Written: February 6, 2015

Abstract

We propose that the presence of short-term investors, such as short sellers, does not necessarily enhance short-termism. On the contrary, based on a sample of 11,969 firms across 33 countries over the 2003-2009 period, we observe that the threat of short selling increases long-term (i.e., R&D) investment. An instrumental variable approach and the use of several regulatory events provide consistent evidence of causality. We identify three possible channels through which short selling promotes long-term investment: improved price efficiency, enhanced disciplining impact, and a more positive feedback effect. Finally, we document that the threat of short selling reduces underinvestment as opposed to inducing overinvestment, and that it enhances the firm’s future growth, performance, and innovation output through encouraging long-term investment. Overall, a more effective short selling market helps to mitigate managerial short-termism.

Keywords: Short selling, Long-term Investment, R&D, International Finance

JEL Classification: G30, M41

Suggested Citation

Massa, Massimo and Wu, Fei and Zhang, Hong and Zhang, Bohui, Saving Long-Term Investment from Short-Termism: The Surprising Role of Short Selling (February 6, 2015). INSEAD Working Paper No. 2015/11/FIN; Asian Finance Association (AsianFA) 2015 Conference Paper. Available at SSRN: https://ssrn.com/abstract=2564380 or http://dx.doi.org/10.2139/ssrn.2564380

Massimo Massa

INSEAD - Finance ( email )

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

Fei Wu (Contact Author)

Shanghai Jiao Tong University (SJTU) - Shanghai Advanced Institute of Finance (SAIF) ( email )

Shanghai Jiao Tong University
211 West Huaihai Road
Shanghai, 200030
China

Hong Zhang

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

Bohui Zhang

The Chinese University of Hong Kong, Shenzhen ( email )

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