Abstract
This review surveys the existing empirical literature on the real effects of short selling on firms, addressing them through three main perspectives: corporate governance, financial decisions, and performance. The results of the (too) few empirical studies under scrutiny converge to a common rationale: a positive impact as a disciplinary mechanism on corporate governance and corporate investment policy and a positive impact on operating and corporate social responsibility (CSR) performance, even if some results are still puzzling. It appears that further investigations are necessary and should test the consequences of short selling on firms from a broader and more systematic perspective, with different theoretical and methodological approaches.
Highlights
Short sellers are currently attracting considerable media attention as they target numerous well-known listed companies in various countries (e.g., Tesla in the USA, Casino in France). Dechow et al (2001) describe a short sell as “a sale of a stock that one does not already own, but has borrowed from a brokerage house, a large institutional investor, or another broker-dealer
Massa et al (2015a) proposed two alternative ways to consider the impact of short selling on investment decisions
They found that short-selling potential affects R&D investment through both channels, for firms with poor internal governance, firms from countries with weaker investor protection, younger firms, and for firms with less news coverage and more analyst forecasting errors. They provided evidence of a positive feedback effect: the presence of short sellers in the market increases investors’ sensitivity to the firm’s stock price. He and Tian (2016) in the U.S showed that the threat of short selling has a positive impact on innovation, “suggesting that short sellers mitigate managerial myopia and that the type of myopia that short sellers help to curb is related more to the underinvestment in resources contributing to the quality and value of long-term projects than to the underinvestment in resources increasing the quantity of such output.”
Summary
Short sellers are currently attracting considerable media attention as they target numerous well-known listed companies in various countries (e.g., Tesla in the USA, Casino in France). Dechow et al (2001) describe a short sell as “a sale of a stock that one does not already own, but has borrowed from a brokerage house, a large institutional investor, or another broker-dealer. Short selling has been seen as endangering the stability of financial markets, causing downward price distortion (Hirshleifer et al, 2011), and increasing market volatility. It was even banned in many countries during the recent financial crisis (Massa et al, 2015b). A huge flow of empirical research has tried to identify the determinants of short selling in terms of size, growth, uncertainty of firm environment, firm complexity, ease of stock borrowing, market liquidity, overvaluation, earnings management, accruals management, CSR attributes, entrenchment—the list is not exhaustive. We classify the results of the empirical research we have identified in terms of three main areas in which short selling impacts organizations: corporate governance, financial decisions, and firm performance
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