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The disciplinary effects of short sales on controlling shareholders

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  • Chen, Shenglan
  • Lin, Bingxuan
  • Lu, Rui
  • Ma, Hui

Abstract

Although the literature (Massa et al., 2011; Karpoff and Lu, 2010) demonstrates the disciplinary effects of short sales on managers, no study has analyzed how short sales can mitigate the agency costs of controlling large shareholders. Using the introduction of short sales in China as an exogenous event, we show that short sales also serve as an effective mechanism in curbing expropriation by the controlling large shareholder. The disciplinary effect is more pronounced for firms with higher ownership concentration and bankruptcy risk, and it is muted when alternative governance mechanisms are in place. Our paper provides new insights into the effects of short sales in the corporate governance domain, specifically in mitigating the agency costs between controlling and minority shareholders.

Suggested Citation

  • Chen, Shenglan & Lin, Bingxuan & Lu, Rui & Ma, Hui, 2018. "The disciplinary effects of short sales on controlling shareholders," Journal of Empirical Finance, Elsevier, vol. 46(C), pages 56-76.
    • Handle: RePEc:eee:empfin:v:46:y:2018:i:c:p:56-76
    DOI: 10.1016/j.jempfin.2017.12.007
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    Cited by:

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    4. Chen, Shenglan & Chou, Robin K. & Liu, Xiaoling & Wu, Yuhui, 2020. "Deregulation of short-selling constraints and cost of bank loans: Evidence from a quasi-natural experiment," Pacific-Basin Finance Journal, Elsevier, vol. 64(C).
    5. Jiang, Jiaoliang, 2022. "Short selling and corporate diversification in emerging markets: Insights from controlling shareholder tunneling," Pacific-Basin Finance Journal, Elsevier, vol. 75(C).
    6. Yang, Xingquan & Yang, Zheng & Ren, Xiaoyi, 2022. "Deregulation of short selling and corporate cash dividend policy: A quasi-natural experiment from China," The North American Journal of Economics and Finance, Elsevier, vol. 63(C).
    7. Luo, Jinbo & Ni, Xiaoran & Tian, Gary Gang, 2020. "Short selling and corporate tax avoidance: Insights from a financial constraint view," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    8. Jieqi Guan & Brian M. Lam & Ching Chi Lam & Ming Liu, 2022. "CEO overconfidence and the level of short-selling activity," Review of Quantitative Finance and Accounting, Springer, vol. 58(2), pages 685-708, February.
    9. Ni, Xiaoran & Yin, Sirui, 2020. "The unintended real effects of short selling in an emerging market," Journal of Corporate Finance, Elsevier, vol. 64(C).

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