Short‐selling constraints and corporate payout policy

Abstract

This study shows that managers adjust corporate payout policies to counteract intensified short-selling pressures following the removal of a short-selling constraint. We use a controlled experiment, the Regulation SHO pilot program, to find that changing the short-selling rule brings small companies to increase cash dividends, but not to repurchase more shares. Because paying dividends is costly, it is acknowledged as a more reliable signal of stock undervaluation than share repurchase. While our evidence suggests that companies select this payout strategy to deter predatory short sellers, it also shows that a short-selling activity has a causal effect on corporate payout decisions.

The association between dividend payout and firm growth: Australian evidence

“…Chen et al . () take advantage of a US SEC pilot programme (2005–2007) that suspended the uptick rule for short selling for selected pilot firms, to argue that firms regard paying dividends as a more reliable signal of stock value than stock repurchases. These findings are consistent with the signalling hypothesis, whereby companies choose dividend payouts to signal their confidence in future growth.…”

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

“…Specifically, we combine two prior theoretical studies on short selling (Khanna and Mathews, 2012) and stakeholder relations (Almazan et al, 2017) and provide empirical evidence for their arguments. Chen et al (2019) show that U.S. firms increase cash dividends to counteract intensified short-selling pressures. Our evidence indicates that because paying dividends is costly and Chinese firms are in strong need of internal funds to seize growth opportunities, labor investment can be a specific channel for firms to show their prospects to outside investors.…”

“…Chen et al . (2019) show that U.S. firms increase cash dividends to counteract intensified short‐selling pressures. Our evidence indicates that because paying dividends is costly and Chinese firms are in strong need of internal funds to seize growth opportunities, labor investment can be a specific channel for firms to show their prospects to outside investors.…”

Toward understanding short‐selling activity: demand and supply

“…Short selling plays an important role in the financial market, as it enhances the market's quality and liquidity. The implications of short selling have attracted much attention from academics, ranging from future return predictability to the real effects on corporate activity (see, e.g., Grullon et al ., 2015; Chen et al ., 2017). However, understanding short selling itself in terms of its determinants has received relatively less attention.…”