Does Short Selling Enhance the Efficiency of Corporate Investments?

DOI: https://doi.org/10.62517/jel.202614411

Author(s)

Deyang Ning

Affiliation(s)

Chengdu University of Foreign Languages, Yibin, Sichuan, China

Abstract

Drawing on the establishment and evolution of China's margin trading and short selling framework, this study conducts a thorough analysis of the governance impact and fundamental processes through which the short selling system influences the investment efficiency of publicly traded firms.This research examines the effects, variations, and internal pathways through which this short selling system influences the efficiency of corporate investments. The analysis focuses on A-share listed firms traded on the Shanghai and Shenzhen stock exchanges in China, using data from 2016 to 2025 as the study sample.Employing a multi-period difference-in-differences (DID) framework alongside Richardson’s (2006) residual model to quantify inefficient investment levels, this research carries out empirical analyses across three aspects: baseline effects, heterogeneity traits, and channels of transmission. The results indicate that short-selling regulations play a pivotal role in lowering inefficiencies in investment, fostering greater investment efficiency, and delivering significant impacts in mitigating excessive investment while addressing insufficient investment.This enhancement is especially evident in companies that exhibit weaker internal controls and have less institutional ownership, highlighting how short-selling restrictions can act as a substitute for internal governance mechanisms. Additional analyses of the pathways reveal that short-selling rules boost the efficiency of corporate investments mainly through three avenues: elevating the accuracy of disclosed information and minimizing information gaps via feedback channels; reinforcing external oversight by increasing scrutiny of dominant stakeholders; and reducing reliance on short-term loans for long-term projects while refining capital structures under financing limitations.This research expands the theoretical understanding of how capital market institutions influence corporate investment activities at the micro level. It offers empirical insights and practical recommendations to help regulators refine short-selling policies and assist companies in enhancing their investment strategies and governance frameworks.

Keywords

Short-Selling Regime; Margin Trading; Investment Efficiency; Inefficient Investment

References

[1] Richardson S. Over-investment of free cash flow[J]. Review of Accounting Studies, 2006, 11(2-3):159-189. [2] Biddle G C, Hilary G, Verdi R S. How does financial reporting quality relate to investment efficiency?[J]. Journal of Accounting and Economics, 2009, 48(2-3):112-131. [3] Jiang Guohua, Yue Heng. The Relationship Between Major Shareholders’ Misappropriation of Listed Companies’ Funds and Stock Returns [J]. Management World, 2005(09):119-126+171. [4] Li Ke, Xu Longbing. Margin Trading and the Risk of Stock Price Crashes: An Analysis Based on Information and Governance Effects [J]. Economic Research Journal, 2014, 49(05): 107-119. [5] Chen Shenglan, Li Zhihua. Short Selling Mechanisms and Dividend Policies of Listed Companies: A Quasi-Natural Experiment Based on the Margin Trading System [J]. Financial Research, 2015(06):162-176. [6] Chu Jian, Fang Junxiong. The Introduction of Short Selling Mechanisms and Investment Efficiency of Listed Companies: A Quasi-Natural Experiment Based on the Margin Trading System [J]. Securities Market Bulletin, 2016(08):25-33+40. [7] Yi Zhihong, Li Yanli, Gao Wei. The Impact of Margin Trading on Corporate Innovation: An Empirical Study Based on a Difference-in-Differences Model [J]. China Industrial Economics, 2019(02):136-154. [8] Gu Naikang, Zhou Yanli. Short Selling Mechanisms, Information Transparency, and Corporate Investment Efficiency [J]. Financial Research, 2017(05):175-190. [9] Zhang Xuan, Guo Sicen, Li Yizong et al. Short Selling and Corporate Short-Term Borrowing for Long-Term Investment: A Quasi-Natural Experiment Based on the Margin Trading System [J]. Accounting Research, 2021(02):58-71. [10] Bu Danlu, Wen Caihong. Institutional Shareholding, Internal Control Quality, and Corporate Investment Efficiency [J]. Accounting Friend, 2020(12):102-108. [11] Xia Lijun, Fang Yiqiang. Government Control, Governance Environment, and Firm Value: Empirical Evidence from the Chinese Securities Market [J]. Economic Research Journal, 2005(05):40-51. [12] Lian Yujun, Peng Fangping, Su Zhi. Financing Constraints and the Sensitivity of Corporate Investment to Cash Flow: An Empirical Test Based on the Neoclassical Investment Model [J]. Financial Research, 2008(10):93-110. [13] Xie Deren, Liao Ke, Zheng Dengjin. Short Selling and Earnings Management in Listed Companies [J]. Accounting Research, 2016(08):42-49+97. [14] Meng Qingbin, Huang Qinghua, Wu Lei. Can the Short Selling Mechanism Curb Misconduct by Listed Companies? [J]. Economic Research Journal, 2019, 54(08):151-167. [15] Jiang Xuanyu, Xu Nianxing. Corporate Overinvestment and the Risk of Stock Market Crashes [J]. Financial Research, 2015(08):143-158.