CEO Confidence Matters: The Real Effects of Short Sale Constraints Revisited

50 Pages Posted: 1 May 2019

See all articles by Juwon Jang

Juwon Jang

Texas A&M University

Eunju Lee

University of Massachusetts Lowell

Date Written: June 1, 2018


This paper investigates the role of managerial biases in the real effects of limits to arbitrage. In a natural experiment setting with Regulation SHO, we find that the lifting of short sale constraints leads to a significant decrease in CEO confidence for pilot firms, and this result is more pronounced for pilot firms with financial constraints and stronger corporate governance. We further find that the real effects of Regulation SHO documented in the literature are primarily driven by such decrease in CEO confidence. Underconfident CEOs of pilot firms tend to decrease corporate investments, reduce earnings management, and improve social performance and employee relations following the removal of short sale constraints. Overall, we identify CEO confidence as a psychological channel through which capital market frictions influence corporate decisions and CEO investment behavior.

Keywords: CEO confidence; Regulation SHO; short sale constraints; corporate investments; earnings management; corporate social responsibility; employee relations

JEL Classification: D22, G18, G31, G32, G41

Suggested Citation

Jang, Juwon and Lee, Eunju, CEO Confidence Matters: The Real Effects of Short Sale Constraints Revisited (June 1, 2018). Available at SSRN: or

Juwon Jang

Texas A&M University ( email )

Langford Building A
798 Ross St.
College Station, TX 77843-3137
United States

Eunju Lee (Contact Author)

University of Massachusetts Lowell ( email )

1 University Ave
Lowell, MA 01854
United States
978-934-2520 (Phone)

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