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Do Short Sellers Affect Corporate Innovation? Evidence from a Policy Experiment

Author

Listed:
  • Jie (Jack) He
  • Xiao (Shaun) Ren
  • Xuan Tian

Abstract

We examine the effect of short sellers on corporate innovation. To establish causality, we use a policy experiment that exogenously removes the short-selling constraint for a randomly selected subsample of Russell 3000 firms. We find that innovation quality, value, and efficiency of treatment firms improve significantly more than those of control firms surrounding the policy shock. The exposure to patenting-related litigation initiated by short sellers is a plausible underlying mechanism through which short sellers discipline firm managers and enhance innovation. Our paper provides new insights into an unintended real effect of short sellers, specifically their improvement of technological innovation. (JEL G14, G18, G34, K22, O31, O32)

Suggested Citation

  • Jie (Jack) He & Xiao (Shaun) Ren & Xuan Tian, 2025. "Do Short Sellers Affect Corporate Innovation? Evidence from a Policy Experiment," The Review of Corporate Finance Studies, Society for Financial Studies, vol. 14(1), pages 125-165.
    • Handle: RePEc:oup:rcorpf:v:14:y:2025:i:1:p:125-165.
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    File URL: http://hdl.handle.net/10.1093/rcfs/cfad007
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    More about this item

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • K22 - Law and Economics - - Regulation and Business Law - - - Business and Securities Law
    • O31 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Innovation and Invention: Processes and Incentives
    • O32 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Management of Technological Innovation and R&D

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