Essay On Short Selling And Investment

This thesis consists of five chapters. Chapter 1 is the preliminaries. Chapter 2 to chapter 4 are the three main chapters of this thesis, which cover the U.S. market. Chapter 5 is the discussion.

Chapter 1 is the preliminaries. It introduces the setting and motivations for the three topics covered in this thesis.

Chapter 2 investigates how the removal of short selling constraints affects a firm’s mergers and acquisition (M&A) using Regulation SHO’s pilot program as a natural experiment. The SEC in the U.S. randomly selected stocks in the Russell 3000 index into the pilot group for which various short sale constraints were removed. I find that during the pilot program, firms in the pilot group significantly reduce their value-destroying M&A activities. The disciplinary effect focuses on firms with a higher level of agency problems or CEO incentive pay. The short sellers of firms in the pilot group significantly increase their activities around the value-destroying M&A announcements to impose pressure. Finally, I show the M&A deal quality of firms in the pilot group improves during the pilot program.

Chapter 3 studies the informativeness of short sales on detecting a firm’s investment inefficiency. I document that short sellers adjust their short positions before the financial statement announcements to utilize their information advantage on firms’ investment in- efficiency. The relationship between a firm’s short sale position and its future investment inefficiency is both statistically and economically significant, and robust to a broad set of control variables. Subsample analysis shows that the informativeness of short sales positions on future investment inefficiency concentrates on overinvestment firms, firms with little board independence, and firms with little CEO incentive pay.

Chapter 4 investigates the effect of board gender diversity on a firm’s investment inefficiency. I document that a firm with at least one female director on its board has significantly less investment inefficiency than firms without one. The fraction of female directors on the board has a significantly negative association with investment inefficiency. An instrumental variable approach shows that this relation is robust after addressing endogeneity concerns. Furthermore, I find that the effect of board gender diversity on investment inefficiency is more pronounced for overinvestment than underinvestment. Consistently, the effect is stronger for firms that have a propensity to overinvest ex-ante. I also document that board independence is a channel for board gender diversity to reduce investment inefficiency.

Chapter 5 summarizes the main findings of the three topics, discusses the implications of the findings, and points out the future direction for research.