The Unintended Real Effects of Short Selling in an Emerging Market
46 Pages Posted: 27 Oct 2015 Last revised: 8 Dec 2018
Date Written: December 1, 2018
Exploiting the staggered removal of short-sale bans in China, we document negative real effects of allowing short selling in an emerging market featured by concentrated ownership and weak investor protection. Pilot firms experience a significant drop in the stock price around the announcement of the program. We also observe a decrease in firm risk and firm performance after the removal of short-sale bans. The effect is stronger when controlling shareholders’ private benefit is large and when corporate governance is weak. In addition, firms reduce equity financing, lower debt ratio, and cut capital investments and R&D expenditures. Contrary to prior studies that find a positive effect of short selling on investment efficiency in developed markets, our findings indicate that the real effects of short selling are negative in emerging markets like China.
Keywords: Short Selling; Short-sale Ban; Corporate Risk-Taking; Controlling Shareholder; Investor Protection
JEL Classification: G34, G38, G14
Suggested Citation: Suggested Citation