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Short‐selling and cost of equity: evidence from China

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  • Ning Hu
  • Siqi Lu
  • Tao Ma
  • Jianfang Ye

Abstract

In this study, we take advantage of the gradual lifting of the short‐selling ban in China and find that firms affected by the lifting of the ban experience a lower cost of equity. In addition, the affected firms also incur less earnings management, higher market liquidity and higher investment efficiency. Further evidence shows that firms’ cost of equity increases after their stocks are no longer eligible for short selling. Our inferences are robust to alternative measures of cost of equity, and to using a propensity score‐matched sample. Our study contributes to the literature by providing evidence that short sellers play a monitoring role in the Chinese stock markets and sheds light on the benefits of short selling in emerging markets.

Suggested Citation

  • Ning Hu & Siqi Lu & Tao Ma & Jianfang Ye, 2020. "Short‐selling and cost of equity: evidence from China," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 3681-3707, December.
    • Handle: RePEc:bla:acctfi:v:60:y:2020:i:4:p:3681-3707
    DOI: 10.1111/acfi.12540
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    References listed on IDEAS

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    Cited by:

    1. Stephie Tsai, Hsin-Ju & Wu, Yuliang & Xu, Bin, 2021. "Does capital market drive corporate investment efficiency? Evidence from equity lending supply," Journal of Corporate Finance, Elsevier, vol. 69(C).

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