Abstract
We study the effects of short selling activities on corporate investment. In a model with short-term managerial incentives, we show that short sellers can cause firms to overinvestment. The overinvestment is more severe for managers with low productivity and/or with high short-term incentives. Empirically, we find that short interest is strongly and positively associated with subsequent corporate investment. The impact of short selling activities on investment is greater when a firm's investment prospect is poor and/or when the sensitivity of a CEO's compensation to stock price performance is strong. Additionally, both short interest and corporate investment are negatively associated with subsequent stock returns.
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