Price pressure effects of short selling on environmental disclosure

ABSTRACT

Most studies argue that short selling is an external constraint mechanism that can restrict managers’ manipulation of financial information according to the disciplining hypothesis. Whether this conclusion is also suitable for environmental information, however, is still unclear. Therefore, we examine the effect of short selling on environmental disclosure by using empirical data from China. We find that pilot firms, after being added to the pilot short-selling list, disclose less environmental information than non-pilot firms do. Further examination shows that the pilot firms’ internal and external monitoring mechanisms can affect managers’ decision-making regarding environmental information. The results suggest that when a short-selling mechanism is implemented, it is important that the appropriate regulatory department mandatorily receives environmental information disclosure. Simultaneously, the pilot firms’ internal and external monitoring mechanisms should be strengthened to mitigate the negative disclosure behavior of managers.

KEYWORDS:

• Short selling
• environmental disclosure
• disciplining hypothesis
• price pressure hypothesis
• monitoring mechanism

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

1. http://money.163.com/17/0211/13/CD0EBS420025814 T.html.

2. The Corporate Environmental Information Disclosure Index (2017) is compiled by the Research Center of Environmental Economics, Fudan University. The full score of this index is 100.

3. The heavy-pollution industries according to the Guide to Environmental Information Disclosure of Public Firms (exposure draft) published by the Ministry of Environmental Protection in 2010 are thermal power, steel, cement, electrolytic aluminum, coal, metallurgy, chemicals, petrochemicals, building materials, paper making, brewing, pharmaceuticals, fermentation, textiles, leather, and mining.

4. The Internal Control Index is from the DIB database http://www.ic-erm.com/.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China under Grant 71572189 and 71102163.