Summary:
The effective restraint of corporate fraud is crucial to protect investor interests and enhance the running efficiency of the capital market. The margin trading and short-selling system launched in 2010 is an important institutional innovation in China's capital market that broke the long-standing “one-sided market” pattern in which short selling was constrained. Compared with other investors, short sellers are more motivated to track and monitor management misconduct (Karpoff and Lou, 2010) and deter management through short selling, thus forming effective external supervision (Massa et al., 2015). China's short-selling system allows investors to short company stocks based on negative information and thus profit from this information. Short selling causes negative information that is illegally hidden by companies to send risk signals to the market, which may attract regulatory attention and increase downward pressure on stock prices, possibly leading to a serious decline in market value and reputation loss for companies (Karpoff et al., 2008). Therefore, management restrains its unethical behavior to maintain the company's market value (Li et al., 2017). However, studies on the relationship between short selling and corporate irregularities are insufficient. Using data from Chinese A-share listed companies from 2008 to 2017 and combining the bivariable probit model and a difference-in-differences model, this paper explores the dual governance effect and transmission path of short selling on corporate fraud from the perspective of market-oriented governance. We find that short selling not only significantly reduces the fraud tendency of the target company but also significantly improves the probability of violation detection. Moreover, we show that short selling significantly reduces the time taken to detect violations. This indicates that the dual governance effect of short selling on corporate violations is mainly realized through two channels: ex-ante deterrence and ex-post punishment. Additionally, the results suggest that the volume of short selling by the target company increases significantly in the year when a violation occurs, which indicates that short sellers have information advantages and a high sensitivity to violations by the target company. Further tests reveal that short selling may have a dual governance effect on corporate irregularities through internal corporate governance efficiency and external market information efficiency. These tests show that short selling strengthens the supervision and intervention of internal governance bodies such as major shareholders and independent directors on corporate violations, thus restraining the trend of prior violations. Moreover, we show that short selling increases the attention paid to the company by analysts in the external capital market and the transmission efficiency of negative information, thus increasing the probability of post-violation detection. We also find that the governance effect of short selling is influenced by the regulatory environment (legal supervision, internal control, and industrial violations) and the characteristics of the target company (company growth, market size, and stock price volatility). This paper makes the following contributions to the literature. First, it expands research on the economic consequences of short selling. Studies on short selling mainly concentrate on the price efficiency of the capital market. However, recently, scholars have begun to focus on the effects of short selling on corporate decisions, including the quality of information disclosure (Karpoff and Lou, 2010; Li et al., 2017), earnings management (Massa et al., 2015), investment and financing strategy choices (Jin et al., 2015; Gu and Zhou, 2017), and corporate innovation (Hao et al., 2018; Tan and Qian, 2020). This paper focuses on corporate violations and sheds light on the economic consequences of short selling. Second, it elucidates the effect and transmission mechanism of short selling on corporate irregularities. Unlike previous studies (Meng et al., 2019), this paper breaks through the single perspective of signal transmission theory and constructs an analytical framework from the dual perspectives of the information efficiency of the capital market and the efficiency of internal corporate governance. It empirically reveals the dual governance effect of short selling on corporate violations. Additionally, we find that short selling significantly shortens the time taken to investigate and punish violations, especially when the short selling volume of the target firm increases significantly in the year when the violation occurs. Third, this study has crucial practical implications. It empirically reveals that short selling plays a market-oriented governance role in restraining corporate violations, suggesting that short selling could become a supplementary means to enhance investor protection. The results indicate that it is of great practical value to introduce a market-oriented governance mechanism of short selling to restrain corporate irregularities and enhance investor protection.
徐细雄, 占恒, 李万利. 卖空机制、双重治理与公司违规 ——基于市场化治理视角的实证检验[J]. 金融研究, 2021, 496(10): 190-206.
XU Xixiong, ZHAN Heng, LI Wanli. Short Selling, Dual Governance, and Corporate Fraud: An Empirical Test Based on Market-oriented Governance. Journal of Financial Research, 2021, 496(10): 190-206.
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