Short-Selling Threats and Corporate Tax Policy: Evidence from Regulation SHO
Posted: 3 Dec 2020 Last revised: 26 Jan 2021
Date Written: November 2, 2020
This study examines the effect of short-selling threats on tax aggressiveness. The SEC’s Regulation SHO pilot program relaxed short-selling constraints for a sample of U.S. stocks, thus leading to an exogenous increase in short-selling threats for these pilot stocks. After controlling for non-randomization of treatment and control firms, we find that pilot firms experienced a significant decrease in tax aggressiveness in the during-pilot period, relative to non-pilot firms. We further find that the effect is stronger when firms are more opaque, when CEOs have greater job-security concerns, and when CEOs’ equity portfolios are more sensitive to share prices. Our findings suggest that short-selling threats, which facilitate the flow of bad news into share prices and thus dampen the price inflation, reduce managers' incentive to use aggressive tax policies as an earnings manipulation tool to inflate share prices.
Keywords: tax-aggressive activities, short-selling threats, agency problems, price efficiency, exogenous shock
JEL Classification: H20, G34, M41
Suggested Citation: Suggested Citation