Does Short-Selling Curb Controlling Shareholders’ Tunneling?-Quasi-Experimental Evidence from China’s 2023 Margin Trading Reform

DOI: https://doi.org/10.62517/jel.202614306

Author(s)

Ruifeng Li

Affiliation(s)

Department of Financial Management, Bohai Campus, Hebei Agricultural University, Cangzhou, Hebei, China

Abstract

Against the backdrop of severe Type II agency conflicts in China’s A-share market, my paper inspects how short-selling deregulation mitigates controlling shareholders’ tunneling behavior. Using the 2023 expansion of margin trading eligible securities as an exogenous quasi-natural experiment, we apply a PSM-matched time-varying DID model for causal identification.Our baseline results show that easing short-selling restrictions significantly reduces tunneling: treated firms see a 20.2% relative drop in their comprehensive tunneling index, with consistent effects across three core tunneling channels. Mechanism analysis identifies stock price crash risk as a key partial mediator, explaining 36.8% of the total effect. We also document a substitution effect between short-selling and other governance mechanisms, with stronger effects for poorly governed, high-controlling-ownership, or high-insolvency-risk firms. All findings hold up to a full set of endogeneity and robustness checks.Further tests confirm that short-selling deregulation improves the market response to related party transactions and boosts firm value and operating performance. This study expands research on short-selling’s governance role in emerging markets, and offers empirical insights for optimizing China’s margin trading system.

Keywords

Short Selling Pressure; Controlling Shareholders; Tunneling; Expansion of Margin Trading Underlying Securities; Quasi-Natural Experiment

References

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