Short‐selling and cost of equity: evidence from China

Abstract

In this study, we take advantage of the gradual lifting of the short‐selling ban in China and find that firms affected by the lifting of the ban experience a lower cost of equity. In addition, the affected firms also incur less earnings management, higher market liquidity and higher investment efficiency. Further evidence shows that firms’ cost of equity increases after their stocks are no longer eligible for short selling. Our inferences are robust to alternative measures of cost of equity, and to using a propensity score‐matched sample. Our study contributes to the literature by providing evidence that short sellers play a monitoring role in the Chinese stock markets and sheds light on the benefits of short selling in emerging markets.

Short selling and labor investment efficiency: evidence from the Chinese stock market

“…1 Second, as downward price pressures increase the cost of equity and potentially make firms become more financially constrained, firms may save costs through 1 They indicate that although shareholders may want to impose restrictions on managers that inhibit their incentives to overinvest, the tendency to overinvest can arise in a setting with asymmetric information but without managerial private benefits. excessive layoffs, leading to underinvestment in labor (Benmelech et al, 2011;Grullon et al, 2015;De Angelis et al, 2017;Hu et al, 2019).…”

“…(2017), facing downward price pressures, firms can choose to overinvest in labor to convey favorable information (i.e., signal better firm prospects) to stakeholders (especially workers) who receive a share of the output, encouraging them to expend more efforts to increase the likelihood of the firm's success. Second, as downward price pressures increase the cost of equity and potentially make firms become more financially constrained, firms may save costs through excessive layoffs, leading to underinvestment in labor (Benmelech et al ., 2011; Grullon et al ., 2015; De Angelis et al ., 2017; Hu et al ., 2019).…”

The influence of the deregulation of short‐selling on related‐party transactions: Evidence from China

“…The proportion of firm-years with actual short-selling is comparable toHu et al (2019)-a study using a short-selling dummy variable in the Chinese market, which reports 17% of firm-years being short-sold from 2007-2016. They also show a median of zero given that the majority of firm-years are not shorted.10 As a sensitivity test, we exclude these observations and our findings remain the same.…”

“…Recent studies report the prominent evidence on the information advantages and the ensuing benefits of short-selling activities in China. For instance, lifting the short-selling ban in China is accompanied by a lower cost of equity, fewer earnings management, higher market liquidity, and higher investment efficiency of the shortable stocks (Hu et al, 2019), an increase in financial-reporting conservatism (Jin et al, 2018), and an enhancement in corporate philanthropic activities (Hou et al, 2019). Collectively, the findings of recent short-selling studies provide evidence that short-sellers play a monitoring role in Chinese stock markets, supporting the government's effort of deregulating short-selling activities.…”

“…For instance,Jian and Wong (2010) sample A-shares from 1998-2002 and have only one firm from banking and financial Institutions. Published short-selling empirical studies have also excluded financial firms in their analysis (e.g.,Desai et al, 2006;Hu et al, 2019;Jin et al, 2018).TA B L E 1…”