Are short selling threats beneficial to creditors? Insights from corporate default risk

Abstract

Employing staggered short-sale deregulation on the Chinese stock market as quasi-exogenous shocks, we find that short-selling threats are associated with higher corporate default risk, especially for firms that are more financially constrained, have higher growth rates, and suffer from higher information asymmetries. In addition, firms with relatively high ex ante default risk experience an increase in the cost of debt and a reduction in new debt financing following regulatory changes. Overall, our findings indicate that short selling threats convey adverse information about firm fundamentals that are useful to creditors, which help them price their products and set up conditions accordingly.