Does Short Selling Inform or Manipulate Capital Investment?
36 Pages Posted: 4 Jul 2019 Last revised: 2 Oct 2020
Date Written: October 1, 2020
Recent theoretical work suggests that short sellers can manipulate firms into making suboptimal investment decisions. In this study, I empirically test whether short sellers improve or harm the efficiency of firms' capital investment. Overall, I show that short selling improves the efficiency of firms' capital budgeting. However, I also demonstrate that following the full repeal of the uptick rule in 2007, short selling now has a deleterious effect on investment efficiency. Furthermore, in subsample analyses, I find support for manipulative short selling taking place in firms with high levels of short-term leverage, stock market liquidity, and informed trading..
Keywords: Corporate Investment, Manipulation, Misvaluation, Panel Data Vector Autoregression, Short Selling
JEL Classification: G14, G31
Suggested Citation: Suggested Citation