Influence of Short Selling Mechanism on Equity Pledge Behaviors of Major Shareholders: Evidence from China’s A Share Market

The margin trading system launched in March 2010 is an important measure of financial innovation in China’s capital market, which brings short selling mechanism to the securities market. Short selling mechanism can improve the pricing efficiency of the stock market, accelerate the spread of negative news of listed companies, increase the downward pressure on their stock prices, and thus may reduce the equity pledge behaviors of major shareholders. By using quarterly data from 2010 to 2020 of A-share listed companies in Shanghai and Shenzhen stock exchanges, this paper empirically examines the inhibitory effect of short selling mechanism on equity pledge behaviors of major shareholders. The paper shows that short selling mechanism significantly inhibits the equity pledge behaviors of major shareholders and reduces the times and ratio of their equity pledge, and that the greater the power of short selling, the more obvious the inhibitory effect. In addition, short selling mechanism can restrain the tunneling practice of major shareholders, improve the equity balance degree of the companies, and therefore reduce the equity pledge behaviors of major shareholders. The findings of the paper enrich the empirical results of short selling mechanism in corporate governance, and also help deepen the understandings of the motives and influence factors of large shareholders’ equity pledge.