The Unintended Real Effects of Short Selling in an Emerging Market

74 Pages Posted: 27 Oct 2015 Last revised: 26 May 2020

See all articles by Xiaoran Ni

Xiaoran Ni

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE); Xiamen University - School of Economics

David Yin

Miami University of Ohio

Date Written: April 1, 2020

Abstract

Exploiting the staggered removal of short-sale bans in China, we document unintended real effects of allowing short selling in an emerging market featured by concentrated ownership and weak investor protection. Pilot firms have worse short-term and long-term market performances after the removal of short-sale bans. Additionally, pilot firms undertake less risk and have worse performance following the launch of the program. The effect is stronger when controlling shareholders’ private benefit is large and when corporate governance is weak. In addition, faced with increased short selling threats, pilot firms cut capital investments and R&D expenditures, reduce equity financing, and lower debt ratios. Contrary to prior studies showing that short selling encourages value-enhancing risky investments in developed markets, our findings suggest that in emerging markets such as China, short selling can result in value losses by inducing firms to forgo profitable risky projects.

Keywords: Short Selling; Short-sale Ban; Risk-Taking; Performance; Controlling Shareholder; Investor Protection

JEL Classification: G34; G38; G14

Suggested Citation

Ni, Xiaoran and Yin, David, The Unintended Real Effects of Short Selling in an Emerging Market (April 1, 2020). Asian Finance Association (AsianFA) 2017 Conference, Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2680336 or http://dx.doi.org/10.2139/ssrn.2680336

Xiaoran Ni (Contact Author)

Xiamen University - Wang Yanan Institute for Studies in Economics (WISE) ( email )

D 204, Economics Building
Xiamen, Fujian 361005
China

Xiamen University - School of Economics ( email )

China

David Yin

Miami University of Ohio ( email )

Oxford, OH 45056
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
418
Abstract Views
2,537
rank
86,399
PlumX Metrics