Can Short Selling Improve the Pay-Performance Sensitivity of Corporate Executives?

DOI: https://doi.org/10.62517/jel.202614509

Author(s)

Yuming Chang

Affiliation(s)

School of International Education, Guizhou Normal University, Guiyang, Guizhou, China *Corresponding Author

Abstract

Short selling is a comparatively new external governance arrangement in China, and how it shapes corporate governance has drawn growing scholarly interest. One question, however, has been largely overlooked: how this arrangement bears on executive pay-performance sensitivity (PPS), which is itself a key gauge of whether compensation contracts work. We treat the 2010 easing of short-selling restrictions in the Chinese capital market as a quasi-natural experiment and, drawing on an unbalanced panel of A-share listed firms spanning 2010 to 2024, use a difference-in-differences (DID) design to assess how short selling affects executive PPS. We find that allowing short selling raises analyst coverage and upgrades the firm's information environment, so executive pay comes to track performance more closely; this pattern holds once heterogeneity is taken into account. Pay becomes more responsive to accounting performance measured by return on assets and return on equity, and pay stickiness is meaningfully curtailed. These findings offer firm-level evidence that can inform regulators refining the short-selling regime and listed firms reconsidering how their compensation committees are designed.

Keywords

Pay-Performance Sensitivity; Short-Selling Mechanism; External Monitoring; Corporate Governance

References

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