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Short selling and firm investment efficiency

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  • Chang Yu

    (University of Otago)

Abstract

This paper investigates the informativeness of short sales on detecting firm investment inefficiency. Neoclassical and agency theory suggest that investment inefficiency destroys firm value by allocating resources to less-valued uses. This paper finds that short-sellers adjust their short positions before the announcement of a financial statement, to use their information advantage on firm investment inefficiency. The relation between the short positions in a firm and its future investment inefficiency is both statistically and economically significant, and robust to a broad set of control variables. Subsample analyses show that the informativeness of short sales positions about future investment inefficiency is concentrated on overinvestment firms, firms with little board independence, and firms with low CEO incentive pay.

Suggested Citation

  • Chang Yu, 2024. "Short selling and firm investment efficiency," Financial Markets and Portfolio Management, Springer;Swiss Society for Financial Market Research, vol. 38(2), pages 191-237, June.
    • Handle: RePEc:kap:fmktpm:v:38:y:2024:i:2:d:10.1007_s11408-023-00442-1
    DOI: 10.1007/s11408-023-00442-1
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    More about this item

    Keywords

    Short selling; Investment efficiency; Capital investment; Corporate governance;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Fixed Investment and Inventory Studies

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