Investigating the Connections Between Short-Selling Deregulation and Green Total Factor Productivity: Empirical Insights from China

China’s economic development has undergone significant transformations in recent years, focusing on quality-driven development and constructing a modern market-oriented economic system. Central to this transformation is the pursuit of high-quality development by enterprises, which entails not only maximizing economic interests but also fostering sustainability and societal benefits. Achieving this delicate balance is a challenging endeavor involving enhancing green total factor productivity (GTFP), which integrates environmental considerations into traditional productivity measures. This research paper explores the intricate relationship between short-selling deregulation and corporate level green total factor productivity in China by employing a quasi-natural experiment approach, the Propensity Score Matching-Difference in Difference (PSM-DID) method. This analysis uncovers the mechanisms by which short-selling deregulation impacts GTFP through financing efficiency, investment efficiency, and green innovation. The heterogeneity of short-selling deregulation is examined based on ownership structure, external financing dependence, and pollution intensity. The findings reveal that short-selling deregulation, as a form of external governance, positively influences GTFP by reducing financing inefficiency, enhancing investment efficiency, and promoting green innovation capabilities. Importantly, this effect is more pronounced for non-state-owned enterprises, companies with higher external financing dependence, and pollution-intensive firms. This study sheds light on the role of short-selling as a crucial external corporate governance mechanism and provides practical implications for policymakers, suggesting that further expansion of short-selling deregulation can promote sustainable development in China.