Hostname: page-component-78c5997874-m6dg7 Total loading time: 0 Render date: 2024-11-15T18:30:15.527Z Has data issue: false hasContentIssue false
  • English
  • Français

Short-Sale Constraints and Corporate Investment

Published online by Cambridge University Press:  15 August 2022

Xiaohu Deng ,
Vishal K. Gupta ,
Marc L. Lipson Open the ORCID record for Marc L. Lipson [Opens in a new window]  and
Sandra Mortal
Xiaohu Deng
Affiliation:
University of New South Wales School of Banking and Finance at the UNSW Business School wesley.deng@unsw.edu.au
Vishal K. Gupta
Affiliation:
University of Alabama Department of Management at the Culverhouse College of Business vkgupta@cba.ua.edu
Marc L. Lipson*
Affiliation:
University of Virginia Finance Area at the Darden School of Business
Sandra Mortal
Affiliation:
University of Alabama Department of Economics Finance and Legal Studies at the Culverhouse College of Business scmortal@cba.ua.edu
*
mlipson@virginia.edu (corresponding author)
Rights & Permissions [Opens in a new window]

Abstract

Core share and HTML view are not available for this content. However, as you have access to this content, a full PDF is available via the ‘Save PDF’ action button.

In a sample of non-U.S. regulatory regime shifts, we find that expanded short selling is associated with stock price declines, reductions in capital expenditure, and lower asset growth. In a reversal of results found for U.S. stocks in a study of Regulation SHO by Grullon, Michenaud, and Weston (2015), our results are stronger for large firms than for small firms. We also show that this investment effect is stronger for firms that previously relied on outside financing. Our results suggest that short-sale policies affect corporate investment and that this effect is not driven by capital constraints.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 58 , Issue 6 , September 2023 , pp. 2489 - 2521
Creative Commons
Creative Common License - CCCreative Common License - BY
This is an Open Access article, distributed under the terms of the Creative Commons Attribution licence (https://creativecommons.org/licenses/by/4.0), which permits unrestricted re-use, distribution and reproduction, provided the original article is properly cited.
Copyright
© The Author(s), 2022. Published by Cambridge University Press on behalf of the Michael G. Foster School of Business, University of Washington

Footnotes

Previous versions of this article benefited from comments from Thomas Boulton, Alex Butler, Bidisha Chakrabarty, Kathleen Fuller, Gustavo Grullon, Jianlei Han, Pankaj Jain, Christine Jiang, Yelena Larkin, Eunju Lee, Thomas McInish, Vikram Nanda, Michael Schill, Sabatino Silveri, participants at the 2017 AFA PhD Poster Session, 2016 NFA Conference, 2016 SFA Annual Meeting, 2015 FMA Doctoral Consortium, 2017 FMA-Europe, University of Mississippi/University of Memphis Joint PhD Seminar, and seminar participants at the University of Alabama, Hong Kong Baptist University, Macquarie University, Monash University, NEOMA Business School, UNSW Sydney, Saint Louis University, University of Memphis, and Wuhan University. We thank Jarrad Harford (the editor) and Matthew Ringgenberg (the referee) for their comments and suggestions, all of which substantially improved the quality of the paper. All errors remain ours.

References

Bai, L. “The Uptick Rule of Short Sale Regulation – Can It Alleviate Downward Price Pressure from Negative Earnings Shocks?” Rutgers Business Law Journal, 5 (2008), 1–63.Google Scholar
Baker, M.; Stein, J.; and Wurgler, J.. “When Does the Market Matter? Stock Prices and the Investment of Equity-Dependent Firms.” Quarterly Journal of Economics, 118 (2003), 969–1005.Google Scholar
Beber, A., and Pagano, M.. “Short Selling Bans Around the World: Evidence from the 2007–09 Crisis.” Journal of Finance, 68 (2013), 343–381.Google Scholar
Bertrand, M., and Mullainathan, S.. “Enjoying the Quiet Life? Corporate Governance and Managerial Preferences.” Journal of Political Economy, 111 (2003), 1043–1075.Google Scholar
Blanchard, O.; Rhee, C.; and Summers, L.. “The Stock Market, Profit, and Investment.” Quarterly Journal of Economics, 108 (1993), 115–136.Google Scholar
Boehmer, E.; Jones, C. M.; and Zhang, X.. “Shackling Short Sellers: The 2008 Shorting Ban.” Review of Financial Studies, 26 (2013), 1363–1400.Google Scholar
Boehmer, E., and Wu, J. J.. “Short Selling and the Price Discovery Process.” Review of Financial Studies, 26 (2013), 287–322.Google Scholar
Bond, P.; Edmans, A.; and Goldstein, I.. “The Real Effects of Financial Markets.” Annual Review of Financial Economics, 4 (2012), 339–360.Google Scholar
Bris, A.; Goetzmann, N. W.; and Zhu, N.. “Efficiency and the Bear: Short Sales and Markets Around the World.” Journal of Finance, 62 (2007), 1029–1079.Google Scholar
Campello, M., and Graham, J. R.. “Do Stock Prices Influence Corporate Decisions? Evidence from the Technology Bubble.” Journal of Financial Economics, 107 (2013), 89–110.Google Scholar
Campello, M.; Ribas, R. P.; and Wang, A. Y.. “Is the Stock Market Just a Side Show? Evidence from a Structural Reform.” Review of Corporate Finance Studies, 3 (2014), 1–38.Google Scholar
Chang, E. C.; Cheng, J. W.; and Yu, Y.. “Short-Sales Constraints and Price Discovery: Evidence from the Hong Kong Market.” Journal of Finance, 62 (2007), 2097–2121.Google Scholar
Chang, E. C.; Luo, Y.; and Ren, J.. “Short-Selling, Margin-Trading, and Price Efficiency: Evidence from the Chinese Market.” Journal of Banking and Finance, 48 (2014), 411–424.Google Scholar
Charoenrook, A., and Daouk, H.. “A Study of Market-Wide Short-Selling Restrictions.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=687562 (2009).Google Scholar
Chen, Q.; Goldstein, I.; and Jiang, W.. “Price Informativeness and Investment Sensitivity to Stock Price.” Review of Financial Studies, 20 (2007), 619–650.Google Scholar
Chirinko, R. S., and Schaller, H.. “Business Fixed Investment and “Bubbles”: The Japanese Case.” American Economic Review, 91 (2001), 663–680.Google Scholar
Chu, Y.; Hirshleifer, D.; and Ma, L.. “The Causal Effect of Limits to Arbitrage on Asset Pricing Anomalies.” Journal of Finance, 75 (2020), 2631–2672.Google Scholar
Claus, J., and Thomas, J.. “Equity Premia as Low as Three Percent? Evidence from Analysts’ Earnings Forecasts for Domestic and International Stock Markets.” Journal of Finance, 56 (2001), 1629–1666.Google Scholar
Cohen, L.; Diether, K. B.; and Malloy, C. J.. “Supply and Demand Shifts in the Shorting Market.” Journal of Finance, 62 (2007), 2061–2096.Google Scholar
Cremers, M.; Guernsey, S. B.; and Sepe, S. M.. “Stakeholder Orientation and Firm Value.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3299889 (2019).Google Scholar
De Angelis, D.; Grullon, G.; and Michenaud, S.. “The Effects of Short-Selling Threats on Incentive Contracts: Evidence from an Experiment.” Review of Financial Studies, 30 (2017), 1627–1659.Google Scholar
Deng, X.; Gao, L.; and Kemme, D. M.. “The Information Content of Short Selling and Put Option Trading: When are They Substitutes?” Working Paper, University of Tasmania (2018).Google Scholar
Deng, X.; Gao, L.; and Kim, J.. “Short-Sale Constraints and Stock Price Crash Risk: Causal Evidence from a Natural Experiment.” Journal of Corporate Finance, 60 (2020), 101498.Google Scholar
Dhaliwal, D.; Krull, L.; and Li, O. Z.. “Did the 2003 Tax Act Reduce the Cost of Equity Capital?” Journal of Accounting and Economics, 43 (2007), 121–150.Google Scholar
Diamond, D. W., and Verrechia, R. E.. “Constraints on Short-Selling and Asset Price Adjustment to Private Information.” Journal of Financial Economics, 18 (1987), 277–311.Google Scholar
Diether, K. B.; Lee, K. H.; and Werner, I. M.. “It’s SHO Time! Short-Sale Price Tests and Market Quality.” Journal of Finance, 64 (2009), 37–73.Google Scholar
Edwards, A. K., and Hanley, K. W.. “Short Selling in Initial Public Offerings.” Journal of Financial Economics, 98 (2010), 21–39.Google Scholar
Engelberg, J. E.; Reed, A. V.; and Ringgenberg, M. C.. “Short-Selling Risk.” Journal of Finance, 73 (2018), 755–786.Google Scholar
Fang, V. W.; Huang, A.; and Karpoff, J.. “Short Selling and Earnings Management: A Controlled Experiment.” Journal of Finance, 71 (2016), 1251–1294.Google Scholar
Francis, J. R.; Khurana, I. K.; and Pereira, R.. “Disclosure Incentives and Effects on Cost of Capital Around the World.” Accounting Review, 80 (2005), 1125–1162.Google Scholar
Gebhardt, W. R.; Lee, C. M.; and Swaminathan, B.. “Toward an Implied Cost of Capital.” Journal of Accounting Research, 39 (2001), 135–176.Google Scholar
Gilchrist, S.; Himmelberg, C. P.; and Huberman, G.. “Do Stock Price Bubbles Influence Corporate Investment?” Journal of Monetary Economics, 52 (2005), 805–827.Google Scholar
Gode, D., and Mohanram, P.. “Inferring the Cost of Capital Using the Ohlson–Juettner Model.” Review of Accounting Studies, 8 (2003), 399–431.Google Scholar
Goldstein, I., and Guembel, A.. “Manipulation and the Allocational Role of Prices.” Review of Economic Studies, 75 (2008), 133–164.Google Scholar
Goldstein, I.; Ozdenoren, E.; and Yuan, K.. “Trading Frenzies and Their Impact on Real Investment.” Journal of Financial Economics, 109 (2013), 566–582.Google Scholar
Goodman-Bacon, A. “Difference-in-Differences with Variation in Treatment Timing.” Journal of Econometrics, 225 (2021), 254–277.Google Scholar
Grullon, G.; Michenaud, S.; and Weston, J. P.. “The Real Effects of Short-Selling Constraints.” Review of Financial Studies, 28 (2015), 1737–1767.Google Scholar
Hao, X.; Lee, E.; and Piqueira, N.. “Short Sales and Put Options: Where is the Bad News First Traded?” Journal of Financial Markets, 16 (2013), 308–330.Google Scholar
He, J., and Tian, X.. “Do Short Sellers Exacerbate or Mitigate Managerial Myopia? Evidence from Patenting Activities.” Working Paper, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2380352 (2016).Google Scholar
Heath, D.; Ringgenberg, M.; Samadi, M.; and Werner, I. M.. “Reusing Natural Experiments.” CEPR Discussion Paper No. DP14710 (2020).Google Scholar
Holmström, B., and Tirole, J.. “Market Liquidity and Performance Monitoring.” Journal of Political Economy, 101 (1993), 678–709.Google Scholar
Ince, O. S., and Porter, R. B.. “Individual Equity Return Data from Thomson Datastream: Handle With Care!” Journal of Financial Research, 29 (2006), 463–479.Google Scholar
Jain, A.; Jain, P. K.; McInish, T. H.; and McKenzie, M.. “Worldwide Reach of Short Selling Regulations.” Journal of Financial Economics, 109 (2013), 177–197.Google Scholar
Jennings, R., and Starks, L.. “Earnings Announcements, Stock Price Adjustment, and the Existence of Option Markets.” Journal of Finance, 41 (1986), 107–125.Google Scholar
Jones, C. M., and Lamont, O. A.. “Short-Sale Constraints and Stock Returns.” Journal of Financial Economics, 66 (2002), 207–239.Google Scholar
Levine, R. “Stock Markets, Growth, and Tax Policy.” Journal of Finance, 46 (1991), 1445–1465.Google Scholar
Li, Z.; Lin, B.; Zhang, T.; and Chen, C.. “Does Short Selling Improve Stock Price Efficiency and Liquidity? Evidence from a Natural Experiment in China.” European Journal of Finance, 24 (2018), 1350–1368.Google Scholar
Litvak, K.; Black, B.; and Yoo, W.. “The SEC’s Busted Randomized Experiment: What Can and Cannot be Learned.” Northwestern Law and Econ Research Paper (2022).Google Scholar
Marsh, I. W., and Payne, R.. “Banning Short Sales and Market Quality: The UK’s Experience.” Journal of Banking and Finance, 36 (2012), 1975–1986.Google Scholar
Massa, M.; Wu, F.; Zhang, B.; and Zhang, H.. “Saving Long-Term Investment from Short-Termism: The Surprising Role of Short Selling.” INSEAD Working Paper No. 2015/11/FIN (2015).Google Scholar
Massa, M.; Zhang, B.; and Zhang, H.. “The Invisible Hand of Short Selling: Does Short Selling Discipline Earnings Management?” Review of Financial Studies, 28 (2015), 1701–1736.Google Scholar
Miller, E. M. “Risk, Uncertainty, and Divergence of Opinion.” Journal of Finance, 32 (1977), 1151–1168.Google Scholar
Morck, R.; Shleifer, A.; Vishny, R. W.; Shapiro, M.; and Poterba, J. M.. “The Stock Market and Investment: Is The Market a Sideshow?” Brookings Papers on Economic Activity, 1990 (1990), 157–215.Google Scholar
Nishiotis, G. P., and Rompolis, L. S.. “Put-Call Parity Violations and Return Predictability: Evidence from the 2008 Short Sale Ban.” Journal of Banking and Finance, 106 (2019), 276–297.Google Scholar
Ofek, E., and Richardson, M.. “Dotcom Mania: The Rise and Fall of Internet Stock Prices.” Journal of Finance, 58 (2003), 1113–1138.Google Scholar
Ofek, E.; Richardson, M.; and Whitelaw, R. F.. “Limited Arbitrage and Short Sales Restrictions: Evidence from the Options Markets.” Journal of Financial Economics, 74 (2004), 305–342.Google Scholar
Polk, C., and Sapienza, P.. “The Stock Market and Corporate Investment: A Test of Catering Theory.” Review of Financial Studies, 22 (2009), 187–217.Google Scholar
Roberts, M. R., and Whited, T. M.. “Endogeneity in Empirical Corporate Finance.” In Handbook of the Economics of Finance, Vol. II, Constantinides, G., Harris, M. and Stulz, R., eds. Amsterdam: Elsevier (2013), 493–572.Google Scholar
Slusky, D. J. “Significant Placebo Results in Difference-in-Differences Analysis: The Case of the ACA’s Parental Mandate.” Eastern Economic Journal, 43 (2017), 580–603.Google Scholar
Stein, J. C. “Rational Capital Budgeting in an Irrational World.” Journal of Business, 69 (1996), 429–455.Google Scholar