Abstract
Recent theoretical work suggests that short sellers can manipulate firms into making suboptimal investment decisions. In this study, I empirically test whether short sellers improve or harm the efficiency of firms' capital investment. Overall, I show that short selling improves the efficiency of firms' capital budgeting. However, I also demonstrate that following the full repeal of the uptick rule in 2007, short selling now has a deleterious effect on investment efficiency. Furthermore, in subsample analyses, I find support for manipulative short selling taking place in firms with high levels of short-term leverage, stock market liquidity, and informed trading..
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