Short Selling Constraints and Politically Motivated Negative Information Suppression

49 Pages Posted: 18 Jun 2020 Last revised: 29 Mar 2021

See all articles by Wesley Deng

Wesley Deng

University of Tasmania

Christine X. Jiang

Fudan University

Danqing Young

The Chinese University of Hong Kong (CUHK) - School of Accountancy

Date Written: March 26, 2021

Abstract

This study examines the effect of short selling constraints on politically motivated suppression of negative information. We use a unique setting in China, in which there are multiple exogenous changes in short selling constraints and firms have strong incentives to suppress negative information during politically sensitive periods. Results from Difference-in-Differences analyses and a regression discontinuity design show that removing short selling constraints can reduce politically motivated bad news suppression. Short selling can reduce negative information suppression through the channel of improved financial reporting quality, more management’s voluntary disclosure, and media’s more timely release of information. In addition, the effect of short selling on reducing bad news hoarding is more pronounced for more politically sensitive meetings and for state-owned firms located in regions with weaker market and institutional development.

Keywords: Short selling constraints; negative information suppression; political pressures; information environment

JEL Classification: G14, G15, G18, G38, M40, M48

Suggested Citation

Deng, Xiaohu and Jiang, Christine X. and Young, Danqing Xu, Short Selling Constraints and Politically Motivated Negative Information Suppression (March 26, 2021). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3610516 or http://dx.doi.org/10.2139/ssrn.3610516

Xiaohu Deng (Contact Author)

University of Tasmania ( email )

Tasmanian School of Business and Economics
Private bag 84
Hobart, TAS 7001
Australia

Christine X. Jiang

Fudan University ( email )

School of Management
Shanghai, 200433
China
862125011085 (Phone)

Danqing Xu Young

The Chinese University of Hong Kong (CUHK) - School of Accountancy ( email )

Shatin, N.T.
Hong Kong
+852 2609 7892 (Phone)
+852 2603 5114 (Fax)

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