Does Capital Market Drive Corporate Investment Efficiency? Evidence from Equity Lending Supply

61 Pages Posted: 12 Jul 2021 Last revised: 9 Oct 2021

See all articles by Hsin-Ju Tsai

Hsin-Ju Tsai

University of Manchester

Yuliang Wu

University of Bradford

Bin Xu

University of Leeds

Date Written: July 8, 2021

Abstract

The increased equity lending supply (ELS) in the equity loan market, available for short sellers to borrow, exposes a firm to greater short selling threats. Considering short sellers’ strong incentives to uncover firm-specific information and monitor managers, we hypothesize that short selling threats, proxied by ELS, enhance corporate investment efficiency. We find that ELS significantly reduces managerial tendencies to underinvest (overinvest) especially for firms prone to underinvest (overinvest). The effect of ELS on investment efficiency is stronger for firms with higher information asymmetry and weaker corporate governance, confirming short sellers’ role in mitigating information and agency costs. However, short selling risk weakens the effect of ELS. Our evidence is robust to endogeneity checks and suggests that corporate investment can be driven by a particular capital market condition: the amount of lendable shares in the equity loan market.

Keywords: equity lending supply, short selling threats, corporate investment efficiency, financial constraints

JEL Classification: G31, G34, G10, D22

Suggested Citation

Tsai, Hsin-Ju and Wu, Yuliang and Xu, Bin, Does Capital Market Drive Corporate Investment Efficiency? Evidence from Equity Lending Supply (July 8, 2021). Journal of Corporate Finance, August 2021, Available at SSRN: https://ssrn.com/abstract=3882918

Hsin-Ju Tsai

University of Manchester ( email )

Oxford Road
Manchester, N/A M13 9PL
United Kingdom

Yuliang Wu

University of Bradford

Bradford, West Yorkshire BD9 4JL
United Kingdom

Bin Xu (Contact Author)

University of Leeds ( email )

Leeds
United Kingdom

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