IDEAS home Printed from https://ideas.repec.org/a/eee/pacfin/v82y2023ics0927538x23002007.html
   My bibliography  Save this article

Is corporate environmental investment a strategic risk management tool? Evidence from short selling threats

Author

Listed:
  • Zhou, Yankun
  • Tang, Taijie
  • Luo, Le

Abstract

This study examines whether corporate environmental investment is employed as a strategic management tool in response to short-selling threats. Using a difference-in-differences approach, we find that corporate environmental investment increases in response to short-selling threats in threatened firms. The impact is more pronounced for firms with greater financial opacity and lower institutional ownership, which is consistent with the risk management hypothesis. Furthermore, we document that companies tend to increase their environmental disclosure in complement to the increase in environmental investment. We also find significant increases in environmental voluntary over regulatory investment after the firms have been added to the short-selling list. Additional analysis suggests that environmental investment reduces overinvestment and investment inefficiency, and it is negatively associated with stock price crash risk.

Suggested Citation

  • Zhou, Yankun & Tang, Taijie & Luo, Le, 2023. "Is corporate environmental investment a strategic risk management tool? Evidence from short selling threats," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    • Handle: RePEc:eee:pacfin:v:82:y:2023:i:c:s0927538x23002007
    DOI: 10.1016/j.pacfin.2023.102129
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927538X23002007
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.pacfin.2023.102129?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Meng, Qingbin & Li, Ying & Jiang, Xuanyu & Chan, Kam C., 2017. "Informed or speculative trading? Evidence from short selling before star and non-star analysts’ downgrade announcements in an emerging market," Journal of Empirical Finance, Elsevier, vol. 42(C), pages 240-255.
    2. Jonathan M. Karpoff & Xiaoxia Lou, 2010. "Short Sellers and Financial Misconduct," Journal of Finance, American Finance Association, vol. 65(5), pages 1879-1913, October.
    3. Yonghong Jia & Xinghua Gao & Scott Julian, 2020. "Do firms use corporate social responsibility to insure against stock price risk? Evidence from a natural experiment," Strategic Management Journal, Wiley Blackwell, vol. 41(2), pages 290-307, February.
    4. Graham, John R. & Li, Si & Qiu, Jiaping, 2008. "Corporate misreporting and bank loan contracting," Journal of Financial Economics, Elsevier, vol. 89(1), pages 44-61, July.
    5. Shameek Konar & Mark A. Cohen, 2001. "Does The Market Value Environmental Performance?," The Review of Economics and Statistics, MIT Press, vol. 83(2), pages 281-289, May.
    6. Hainmueller, Jens, 2012. "Entropy Balancing for Causal Effects: A Multivariate Reweighting Method to Produce Balanced Samples in Observational Studies," Political Analysis, Cambridge University Press, vol. 20(1), pages 25-46, January.
    7. Cory A. Cassell & Michael S. Drake & Stephanie J. Rasmussen, 2011. "Short Interest as a Signal of Audit Risk," Contemporary Accounting Research, John Wiley & Sons, vol. 28(4), pages 1278-1297, December.
    8. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    9. Chen, Joseph & Hong, Harrison & Stein, Jeremy C., 2001. "Forecasting crashes: trading volume, past returns, and conditional skewness in stock prices," Journal of Financial Economics, Elsevier, vol. 61(3), pages 345-381, September.
    10. Ni, Xiaoran & Zhu, Weikang, 2016. "Short-sales and stock price crash risk: Evidence from an emerging market," Economics Letters, Elsevier, vol. 144(C), pages 22-24.
    11. Denis, David J. & Sarin, Atulya, 1999. "Ownership and board structures in publicly traded corporations," Journal of Financial Economics, Elsevier, vol. 52(2), pages 187-223, May.
    12. Hemang Desai & K. Ramesh & S. Ramu Thiagarajan & Bala V. Balachandran, 2002. "An Investigation of the Informational Role of Short Interest in the Nasdaq Market," Journal of Finance, American Finance Association, vol. 57(5), pages 2263-2287, October.
    13. Hans B. Christensen & Luzi Hail & Christian Leuz, 2021. "Mandatory CSR and sustainability reporting: economic analysis and literature review," Review of Accounting Studies, Springer, vol. 26(3), pages 1176-1248, September.
    14. Barth, Me & Mcnichols, Mf, 1994. "Estimation And Market Valuation Of Environmental Liabilities Relating To Superfund Sites," Journal of Accounting Research, Wiley Blackwell, vol. 32, pages 177-209.
    15. Jeffrey, Cynthia & Perkins, Jon D., 2014. "The Relationship between Energy Taxation and Business Environmental Protection Expenditures in the European Union," The International Journal of Accounting, Elsevier, vol. 49(4), pages 403-425.
    16. Sebouh Aintablian & Patricia A. Mcgraw & Gordon S. Roberts, 2007. "Bank Monitoring and Environmental Risk," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1‐2), pages 389-401, January.
    17. Sebouh Aintablian & Patricia A. Mcgraw & Gordon S. Roberts, 2007. "Bank Monitoring and Environmental Risk," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 34(1-2), pages 389-401.
    18. Christophe, Stephen E. & Ferri, Michael G. & Hsieh, Jim, 2010. "Informed trading before analyst downgrades: Evidence from short sellers," Journal of Financial Economics, Elsevier, vol. 95(1), pages 85-106, January.
    19. Hope, Ole-Kristian & Hu, Danqi & Zhao, Wuyang, 2017. "Third-party consequences of short-selling threats: The case of auditor behavior," Journal of Accounting and Economics, Elsevier, vol. 63(2), pages 479-498.
    20. Vivian W. Fang & Allen H. Huang & Jonathan M. Karpoff, 2016. "Short Selling and Earnings Management: A Controlled Experiment," Journal of Finance, American Finance Association, vol. 71(3), pages 1251-1294, June.
    21. Chan, Lilian H. & Chen, Kevin C.W. & Chen, Tai-Yuan & Yu, Yangxin, 2012. "The effects of firm-initiated clawback provisions on earnings quality and auditor behavior," Journal of Accounting and Economics, Elsevier, vol. 54(2), pages 180-196.
    22. Hutton, Amy P. & Marcus, Alan J. & Tehranian, Hassan, 2009. "Opaque financial reports, R2, and crash risk," Journal of Financial Economics, Elsevier, vol. 94(1), pages 67-86, October.
    23. Zhang, Qi & Yu, Zhi & Kong, Dongmin, 2019. "The real effect of legal institutions: Environmental courts and firm environmental protection expenditure," Journal of Environmental Economics and Management, Elsevier, vol. 98(C).
    24. Kim, Yongtae & Li, Haidan & Li, Siqi, 2014. "Corporate social responsibility and stock price crash risk," Journal of Banking & Finance, Elsevier, vol. 43(C), pages 1-13.
    25. Anderson, Ronald C. & Duru, Augustine & Reeb, David M., 2012. "Investment policy in family controlled firms," Journal of Banking & Finance, Elsevier, vol. 36(6), pages 1744-1758.
    26. Asquith, Paul & Pathak, Parag A. & Ritter, Jay R., 2005. "Short interest, institutional ownership, and stock returns," Journal of Financial Economics, Elsevier, vol. 78(2), pages 243-276, November.
    27. Berkman, Henk & Eugster, Marco, 2017. "Short on drugs: Short selling during the drug development process," Journal of Financial Markets, Elsevier, vol. 33(C), pages 102-123.
    28. Buchanan, Bonnie & Cao, Cathy Xuying & Chen, Chongyang, 2018. "Corporate social responsibility, firm value, and influential institutional ownership," Journal of Corporate Finance, Elsevier, vol. 52(C), pages 73-95.
    29. Zelong Wei & Hao Shen & Kevin Zheng Zhou & Julie Juan Li, 2017. "How Does Environmental Corporate Social Responsibility Matter in a Dysfunctional Institutional Environment? Evidence from China," Journal of Business Ethics, Springer, vol. 140(2), pages 209-223, January.
    30. Patten, Dennis M., 2005. "The accuracy of financial report projections of future environmental capital expenditures: a research note," Accounting, Organizations and Society, Elsevier, vol. 30(5), pages 457-468, July.
    31. Ekkehart Boehmer & Charles M. Jones & Xiaoyan Zhang, 2008. "Which Shorts Are Informed?," Journal of Finance, American Finance Association, vol. 63(2), pages 491-527, April.
    32. Yohan Bernard & Laurence Godard & Mohamed Zouaoui, 2018. "The Effect of CEOs’ Turnover on the Corporate Sustainability Performance of French Firms," Journal of Business Ethics, Springer, vol. 150(4), pages 1049-1069, July.
    33. Theodore E. Christensen & Michael S. Drake & Jacob R. Thornock, 2014. "Optimistic Reporting and Pessimistic Investing: Do Pro Forma Earnings Disclosures Attract Short Sellers?," Contemporary Accounting Research, John Wiley & Sons, vol. 31(1), pages 67-102, March.
    34. Blau, Benjamin M. & DeLisle, Jared R. & Price, S. McKay, 2015. "Do sophisticated investors interpret earnings conference call tone differently than investors at large? Evidence from short sales," Journal of Corporate Finance, Elsevier, vol. 31(C), pages 203-219.
    35. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
    36. Chen, Yi-Chun & Hung, Mingyi & Wang, Yongxiang, 2018. "The effect of mandatory CSR disclosure on firm profitability and social externalities: Evidence from China," Journal of Accounting and Economics, Elsevier, vol. 65(1), pages 169-190.
    37. Jing‐Lin Duanmu & Maoliang Bu & Russell Pittman, 2018. "Does market competition dampen environmental performance? Evidence from China," Strategic Management Journal, Wiley Blackwell, vol. 39(11), pages 3006-3030, November.
    38. Massimo Massa & Bohui Zhang & Hong Zhang, 2015. "The Invisible Hand of Short Selling: Does Short Selling Discipline Earnings Management?," The Review of Financial Studies, Society for Financial Studies, vol. 28(6), pages 1701-1736.
    39. Choi, Bobae & Luo, Le, 2021. "Does the market value greenhouse gas emissions? Evidence from multi-country firm data," The British Accounting Review, Elsevier, vol. 53(1).
    40. Cormier, Denis & Magnan, Michel, 1997. "Investors' assessment of implicit environmental liabilities: An empirical investigation," Journal of Accounting and Public Policy, Elsevier, vol. 16(2), pages 215-241.
    41. Li, Hao & Li, Zhisheng & Lin, Bingxuan & Xu, Xiaowei, 2019. "The effect of short sale constraints on analyst forecast quality: Evidence from a natural experiment in China," Economic Modelling, Elsevier, vol. 81(C), pages 338-347.
    42. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," The Review of Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
    43. Tom Lee & Louis L. Wilde, 1980. "Market Structure and Innovation: A Reformulation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 94(2), pages 429-436.
    44. Sudheer Chava, 2014. "Environmental Externalities and Cost of Capital," Management Science, INFORMS, vol. 60(9), pages 2223-2247, September.
    45. Garber, Steven & Hammitt, James K., 1998. "Risk Premiums for Environmental Liability: Does Superfund Increase the Cost of Capital?," Journal of Environmental Economics and Management, Elsevier, vol. 36(3), pages 267-294, November.
    46. Xingqiang Du & Wei Jian & Quan Zeng & Yingjie Du, 2014. "Corporate Environmental Responsibility in Polluting Industries: Does Religion Matter?," Journal of Business Ethics, Springer, vol. 124(3), pages 485-507, October.
    47. Ekkehart Boehmer & Juan (Julie) Wu, 2013. "Short Selling and the Price Discovery Process," The Review of Financial Studies, Society for Financial Studies, vol. 26(2), pages 287-322.
    48. Le Luo, 2019. "The influence of institutional contexts on the relationship between voluntary carbon disclosure and carbon emission performance," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 59(2), pages 1235-1264, June.
    49. Kohlbeck, Mark & Mayhew, Brian W., 2010. "Valuation of firms that disclose related party transactions," Journal of Accounting and Public Policy, Elsevier, vol. 29(2), pages 115-137, March.
    50. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-1168, September.
    51. X. Meng & S. Zeng & C. Tam & X. Xu, 2013. "Whether Top Executives’ Turnover Influences Environmental Responsibility: From the Perspective of Environmental Information Disclosure," Journal of Business Ethics, Springer, vol. 114(2), pages 341-353, May.
    52. Gustavo Grullon & Sébastien Michenaud & James P. Weston, 2015. "The Real Effects of Short-Selling Constraints," The Review of Financial Studies, Society for Financial Studies, vol. 28(6), pages 1737-1767.
    53. Frank Gigler & Chandra Kanodia & Haresh Sapra & Raghu Venugopalan, 2014. "How Frequent Financial Reporting Can Cause Managerial Short‐Termism: An Analysis of the Costs and Benefits of Increasing Reporting Frequency," Journal of Accounting Research, Wiley Blackwell, vol. 52(2), pages 357-387, May.
    54. Judith L. Walls & Pascual Berrone & Phillip H. Phan, 2012. "Corporate governance and environmental performance: is there really a link?," Strategic Management Journal, Wiley Blackwell, vol. 33(8), pages 885-913, August.
    55. Charles H. Cho & Martin Freedman & Dennis M. Patten, 2012. "Corporate disclosure of environmental capital expenditures," Accounting, Auditing & Accountability Journal, Emerald Group Publishing Limited, vol. 25(3), pages 486-507, March.
    56. Johnston, Derek, 2005. "An investigation of regulatory and voluntary environmental capital expenditures," Journal of Accounting and Public Policy, Elsevier, vol. 24(3), pages 175-206.
    57. Liao, Xianchun & Shi, Xunpeng (Roc), 2018. "Public appeal, environmental regulation and green investment: Evidence from China," Energy Policy, Elsevier, vol. 119(C), pages 554-562.
    58. Justin Tan, 2002. "Impact of Ownership Type on Environment–Strategy Linkage and Performance: Evidence from a Transitional Economy," Journal of Management Studies, Wiley Blackwell, vol. 39(3), pages 333-354, May.
    59. Clarkson, Peter M. & Li, Yue & Richardson, Gordon D. & Vasvari, Florin P., 2008. "Revisiting the relation between environmental performance and environmental disclosure: An empirical analysis," Accounting, Organizations and Society, Elsevier, vol. 33(4-5), pages 303-327.
    60. Tyler R. Henry & Jennifer L. Koski, 2010. "Short Selling Around Seasoned Equity Offerings," The Review of Financial Studies, Society for Financial Studies, vol. 23(12), pages 4389-4418, December.
    61. Paul C. Godfrey & Craig B. Merrill & Jared M. Hansen, 2009. "The relationship between corporate social responsibility and shareholder value: an empirical test of the risk management hypothesis," Strategic Management Journal, Wiley Blackwell, vol. 30(4), pages 425-445, April.
    62. Robert D. Klassen & Curtis P. McLaughlin, 1996. "The Impact of Environmental Management on Firm Performance," Management Science, INFORMS, vol. 42(8), pages 1199-1214, August.
    63. Hou, Deshuai & Meng, Qingbin & Zhang, Kai & Chan, Kam C., 2019. "Motives for corporate philanthropy propensity: Does short selling matter?," International Review of Economics & Finance, Elsevier, vol. 63(C), pages 24-36.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Xufeng Liu & Die Wan, 2022. "Does short‐selling affect mutual fund shareholdings? Evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(S1), pages 1887-1923, April.
    2. Meng, Qingbin & Li, Xinyu & Chan, Kam C. & Gao, Shenghao, 2020. "Does short selling affect a firm's financial constraints?," Journal of Corporate Finance, Elsevier, vol. 60(C).
    3. Brockman, Paul & Luo, Juan & Xu, Limin, 2020. "The impact of short-selling pressure on corporate employee relations," Journal of Corporate Finance, Elsevier, vol. 64(C).
    4. Mazouz, Khelifa & Wu, Yuliang, 2022. "Why do firm fundamentals predict returns? Evidence from short selling activity," International Review of Financial Analysis, Elsevier, vol. 79(C).
    5. Ge-zhi Wu & Da-ming You, 2021. "Margin trading, short selling and corporate green innovation," Papers 2107.11255, arXiv.org, revised Aug 2021.
    6. Hanauer, Matthias X. & Lesnevski, Pavel & Smajlbegovic, Esad, 2023. "Surprise in short interest," Journal of Financial Markets, Elsevier, vol. 65(C).
    7. Nilabhra Bhattacharya & Theodore E. Christensen & Qunfeng Liao & Bo Ouyang, 2022. "Can short sellers constrain aggressive non-GAAP reporting?," Review of Accounting Studies, Springer, vol. 27(2), pages 391-440, June.
    8. Chang, Eric C. & Lin, Tse-Chun & Ma, Xiaorong, 2019. "Does short-selling threat discipline managers in mergers and acquisitions decisions?," Journal of Accounting and Economics, Elsevier, vol. 68(1).
    9. Wang, Yuchen & Wang, Xiaoming, 2023. "Economic policy uncertainty and information intermediary: The case of short seller," Economic Modelling, Elsevier, vol. 120(C).
    10. Bui, Dien Giau & Hasan, Iftekhar & Lin, Chih-Yung & Nguyen, Hong Thoa, 2023. "Short-selling threats and bank risk-taking: Evidence from the financial crisis," Journal of Banking & Finance, Elsevier, vol. 150(C).
    11. Blau, Benjamin M. & DeLisle, Jared R. & Price, S. McKay, 2015. "Do sophisticated investors interpret earnings conference call tone differently than investors at large? Evidence from short sales," Journal of Corporate Finance, Elsevier, vol. 31(C), pages 203-219.
    12. Archana Jain & Chinmay Jain & Ashok Robin, 2020. "Does accounting conservatism deter short sellers?," Review of Quantitative Finance and Accounting, Springer, vol. 54(3), pages 1075-1100, April.
    13. 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).
    14. R. Jared DeLisle & Bong Soo Lee & Nathan Mauck, 2016. "The dynamic relation between options trading, short selling, and aggregate stock returns," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 645-671, October.
    15. Haiyan Jiang & Ahsan Habib & Mostafa Monzur Hasan, 2022. "Short Selling: A Review of the Literature and Implications for Future Research," European Accounting Review, Taylor & Francis Journals, vol. 31(1), pages 1-31, January.
    16. Callen, Jeffrey L. & Fang, Xiaohua, 2015. "Short interest and stock price crash risk," Journal of Banking & Finance, Elsevier, vol. 60(C), pages 181-194.
    17. Deng, Xiaohu & Gao, Lei & Kim, Jeong-Bon, 2020. "Short-sale constraints and stock price crash risk: Causal evidence from a natural experiment," Journal of Corporate Finance, Elsevier, vol. 60(C).
    18. Wu, Xiting & Jiang, Haiyan & Lin, Hui & You, Jiaxing, 2023. "Why Muddy the Water? Short selling and the disclosure of proprietary information," The British Accounting Review, Elsevier, vol. 55(4).
    19. Hackney, John & Henry, Tyler R. & Koski, Jennifer L., 2020. "Arbitrage vs. informed short selling: Evidence from convertible bond issuers," Journal of Corporate Finance, Elsevier, vol. 65(C).
    20. Dai, Rui & Ng, Lilian & Zaiats, Nataliya, 2022. "Short seller attention," Journal of Corporate Finance, Elsevier, vol. 72(C).

    More about this item

    Keywords

    China; Environmental investment; Financial transparency; Institutional ownership; Risk management; Short-selling threats;
    All these keywords.

    JEL classification:

    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • Q56 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Environment and Development; Environment and Trade; Sustainability; Environmental Accounts and Accounting; Environmental Equity; Population Growth

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:pacfin:v:82:y:2023:i:c:s0927538x23002007. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/pacfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.