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Modeling the unintended consequences of short selling for innovation investment

Author

Listed:
  • Peng, Juan
  • Huang, Wenli
  • Gao, Han
  • Wang, Hongli

Abstract

We develop an innovation investment decision model for firms facing a short selling threat. We find that an endogenous agency problem may arise as an unintended consequence of short selling under the prevailing compensation structure. Specifically, the manager has strong incentives to seek better compensation at the expense of decreasing firm value by reducing long-term innovation investment to save cash reserves to protect the short-term price because the manager’s compensation is closely tied to this value. Finally, our model predicts that both the lending supply and short selling will induce the manager to underinvest and have a negative effect on firm value and the manager’s private benefit because they exacerbate agency conflicts.

Suggested Citation

  • Peng, Juan & Huang, Wenli & Gao, Han & Wang, Hongli, 2022. "Modeling the unintended consequences of short selling for innovation investment," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).
    • Handle: RePEc:eee:ecofin:v:62:y:2022:i:c:s1062940822001085
    DOI: 10.1016/j.najef.2022.101763
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    References listed on IDEAS

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    More about this item

    Keywords

    Short selling threat; Innovation investment; Firm value; Private benefit;
    All these keywords.

    JEL classification:

    • D20 - Microeconomics - - Production and Organizations - - - General
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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