Does short selling affect the investment of Chinese firms? An external financing perspective

ABSTRACT

The objective of this paper is to explore the effect of short selling on firm investment from the perspective of external financing. We find that short selling makes it more difficult for firms to finance investment projects with external funds, and firms react to this exogenous shock by reducing their investment. The effect is more obvious in firms with lower stock price synchronicity, more investment in innovation projects and more severe internal financing constraints. Moreover, we find that after removing short selling constraints, the value-added effect of firm investment on firm value is enhanced.

KEYWORDS:

• Short selling
• external financing
• firm investment
• firm value

Disclosure statement

No potential conflict of interest was reported by the authors.

Correction Statement

This article has been republished with minor changes. These changes do not impact the academic content of the article.

Notes

1. $C(W)$ is a private non-pecuniary cost.

2. The derivation of $0<\frac{{\tau }_{p_s}}{{\tau }_f+{\tau }_l+{\tau }_{p_s}}<\frac{{\tau }_{p_{ns}}}{{\tau }_f+{\tau }_l+{\tau }_{p_{ns}}}$ is shown in the Appendix B.

3. For the reason that if both the numerator and denominator of a true score plus a same number that is greater than 0, the true score will become larger.

4. The classification method is according to CSRC announcement (index number: 40000895X/2012-07017).

5. If the correlation coefficient between two variables is greater than 0.8, it is considered that there is a multicollinearity problem.

6. We use variable $Tobin{Q}_{i,t}$ to represent firm value. Detailed definition of $TobinQ$ is provided in Appendix A. Variable $X_{i,t}$ in Equation (31) refers to control variables discussed in section 3.2.5.

7. It refers to the fictitious time for a pilot firm to enter the short-selling list.

8. It refers to the actual time for a pilot firm to enter the short-selling list.

9. Chang, Cheng, and Yu (2007) also find more stock price volatility after removing short selling constraints.

Additional information

Funding

This work was supported by the the Fujian Natural Science Foundation of China [2017J01794]; the Fujian Social Science Foundation of China [FJ2018C045].