Does Short Selling Affect Corporate Payout Policy Evidence from China

ABSTRACT

Using China’s short-selling pilot program as an exogenous shock, we provide evidence that removal of short selling constraint has significantly increased firms’ dividend payout. This positive effect is more pronounced for firms with weak monitoring and firms with more information opacity, suggesting that short selling plays an important governance role in investor protection and information disclosure. This association is robust to a series of robustness checks. Furthermore, we find that firms with active short selling activities are more likely to increase the dividend payout, small firms or big firms both show significant increase in dividends after introduced into pilot list, but the effect is weaker for those engaged in repurchase shares. Overall, this study sheds light on the role of short-selling on firms’ payout policy in the emerging market.

KEYWORDS:

• Short selling
• dividends
• corporate governance
• information asymmetry

JEL:

• D82
• G14
• G18
• G35

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Supplementary Material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/1540496X.2022.2083498

Notes

1. We discussed the specific rules of short selling in the supplementary document.

2. The listed firm in China, stock code 600609.

3. In 2006, the Chinese government formulated the new accounting standards for business enterprises, which came into force on January 1, 2007. The new accounting standards have been significantly revised and improved, affecting firms’ practice of conservative principle.

4. The existing literature shows that COVID-19 has greatly changed the firms’ business strategy. For example, Krieger et al. (2021) find evidence of increased dividend cuts across all industries in the U.S publicly traded firms during the pandemic.

5. On April 22, 1998, Shanghai and Shenzhen stock exchanges announced that special treatment would be carried out for the stock transactions of listed companies with abnormal financial or other conditions, and the abbreviation was prefixed with “ST”.

6. The sample selection process is summarized in Table S1 in online supplemental document.

7. The Payout1 based on earnings, and show how much of earnings are distributed to shareholders. However, if the earnings are zero or negative, it is hard to explain, so we exclude the observations with zero or negative earnings.

8. Detailed description is presented in Table S4 in online supplemental document.

9. Thank anonymous reviewers for this suggestion.