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Short-selling and corporate innovation: evidence from the Chinese market

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  • Chuntao Li
  • Hongmei Xu
  • Liwei Wang
  • Peng Zhou

Abstract

Short selling has been demonstrated as an important external corporate governance mechanism, which can discipline managerial behaviours and mitigate principle-agent conflicts in developed markets. With a data set of Chinese public companies, we examine the governance effect of short selling on corporate innovation in China. We find that short selling has a significantly positive effect on corporate innovation regarding both innovation quantity and quality. Our cross-sectional tests show that the positive effect of short-selling is more pronounced for firms with weaker internal and external corporate governance. Lastly, we document that short-selling improves corporate innovation through lowering firms’ information asymmetry and improving the efficiency of managerial contract. Our results indicate that short-selling is a necessary complementary mechanism of firms’ corporate governance system in China.

Suggested Citation

  • Chuntao Li & Hongmei Xu & Liwei Wang & Peng Zhou, 2019. "Short-selling and corporate innovation: evidence from the Chinese market," China Journal of Accounting Studies, Taylor & Francis Journals, vol. 7(3), pages 293-316, July.
    • Handle: RePEc:taf:rcjaxx:v:7:y:2019:i:3:p:293-316
    DOI: 10.1080/21697213.2019.1676044
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