Short-selling and corporate innovation: evidence from the Chinese market

Abstract

ABSTRACTShort selling has been demonstrated as an important external corporate governance mechanism, which can discipline managerial behaviours and mitigate principle-agent conflicts in developed markets. With a data set of Chinese public companies, we examine the governance effect of short selling on corporate innovation in China. We find that short selling has a significantly positive effect on corporate innovation regarding both innovation quantity and quality. Our cross-sectional tests show that the positive effect of short-selling is more pronounced for firms with weaker internal and external corporate governance. Lastly, we document that short-selling improves corporate innovation through lowering firms’ information asymmetry and improving the efficiency of managerial contract. Our results indicate that short-selling is a necessary complementary mechanism of firms’ corporate governance system in China.