The Impact of Short Selling Constraints on Corporate Investment Efficiency: Evidence from China's A-Share Market (2021-2024)

DOI: https://doi.org/10.62517/jel.202614308

Author(s)

Weiyue Ma

Affiliation(s)

Shanghai Lixin University of Accounting and Finance, Shanghai, China

Abstract

This paper investigates how constraints on short selling activity influence the efficiency of corporate capital allocation, drawing upon a sample of A-share firms listed on China's two main bourses from 2021 through 2024. The regulatory decision by the China Securities Regulatory Commission (CSRC) to halt securities lending and borrowing (SLB) operations in July 2024 serves as a rare exogenous shock, enabling a DID framework based on the 2024 policy shock to assess the disciplinary function that short selling serves in shaping managerial investment decisions. Results reveal that the presence of short selling threats materially enhances how efficiently firms deploy capital, manifesting as measurable reductions in both excessive capital expenditures and insufficient investment. When the 2024 regulatory crackdown effectively eliminated SLB activities, previously monitored firms displayed a marked deterioration in investment efficiency, offering compelling reverse causal evidence for the governance value of short selling during normal times. Moreover, the disciplining influence proves more salient among firms characterized by weaker internal oversight structures and lower levels of institutional shareholding, pointing to a substitutive dynamic between market-based external discipline and internally governed monitoring arrangements. These findings extend scholarly understanding of external governance architectures and furnish regulators with empirical benchmarks for weighing the micro-level welfare implications of macro-prudential market interventions.

Keywords

Short Selling Constraints; Investment Efficiency; Corporate Governance; Difference-in-Differences; China A-Share Market

References

[1] Grullon, G., Michenaud, S., & Weston, J. P. (2015). The real effects of short-selling constraints. Review of Financial Studies, 28(6), 1737-1767. [2] Jensen, M. C., & Meckling, W. H. (1976). Theory of the firm: Managerial behavior, agency costs and ownership structure. Journal of Financial Economics, 3(4), 305-360. [3] Li, Z., Chen, C., & Lin, B. (2015). Does the short-selling mechanism improve the pricing efficiency of the Chinese stock market? Evidence from natural experiments. Economic Research Journal, 50(4), 165-177. [4] Chang, E. C., Luo, Y., & Ren, J. (2014). Short-selling, margin-trading, and price efficiency: Evidence from the Chinese market. Journal of Banking & Finance, 48, 411-424. [5] Karpoff, J. M., & Lou, X. (2010). Short sellers and financial misconduct. Journal of Finance, 65(5), 1879-1913. [6] Bris, A., Goetzmann, W. N., & Zhu, N. (2007). Efficiency and the bear: Short sales and markets around the world. Journal of Finance, 62(3), 1029-1079. [7] Li, Z., Lin, B., Zhang, T., & Chen, C. (2018). Does short selling improve stock price efficiency and liquidity? Evidence from a natural experiment in China. European Journal of Finance, 24(15), 1350-1368. [8] Massa, M., Zhang, B., & Zhang, H. (2015). The invisible hand of short selling: Does short selling discipline earnings management? Review of Financial Studies, 28(6), 1701-1736. [9] Li, C., Liu, B., & Zhou, P. (2017). Short selling and information disclosure: Evidence from a quasi-natural experiment on securities financing. Financial Research, (9), 130-145. [10] Kuang, X., Jiang, J., Luo, C., & Lin, H. (2024). Short selling and total-factor productivity: Evidence from a quasi-natural experiment in China. Emerging Markets Finance and Trade, 60(10), 2111-2125. [11] Hou, D., Yan, J., Sun, Q., & Chen, Y. (2025). Short-selling and corporate ESG performance: Evidence from China. Sustainability Accounting, Management and Policy Journal, 16(2), 443-483. [12] Richardson, S. (2006). Over-investment of free cash flow. Review of Accounting Studies, 11(2-3), 159-189. [13] Chen, S., Sun, Z., Tang, S., & Wu, D. (2011). Government intervention and investment efficiency: Evidence from China. Journal of Corporate Finance, 17(2), 259-271. [14] Scharfstein, D. S., & Stein, J. C. (2000). The dark side of internal capital markets: Divisional rent-seeking and inefficient investment. Journal of Finance, 55(6), 2537-2564. [15] Shleifer, A., & Vishny, R. W. (1997). A survey of corporate governance. Journal of Finance, 52(2), 737-783. [16] Gillan, S. L., & Starks, L. T. (2000). Corporate governance proposals and shareholder activism: The role of institutional investors. Journal of Financial Economics, 57(2), 275-305.