The effect of short selling on corporate social responsibility: Evidence from a quasi‐experiment

Abstract

Stakeholder demands have been viewed as constraints on the organization, as well as opportunities that can benefit the firm. To distinguish between these views, we use a natural experiment to study how relaxing constraints on short selling affects corporate social responsibility (CSR). With a difference‐in‐differences design, we find that relaxing short selling constraints has a positive impact on CSR investment. Furthermore, we find that the increase in CSR varies with measures of overvaluation and financial constraints, is mainly attributable to the strategic subset of CSR rather than the social subset, and is driven by a decrease in CSR concerns. Our result is consistent with the view that CSR can benefit the firm through an insurance effect: firms increase CSR as protection from bad news becoming more readily incorporated into stock prices from greater short selling.