Short Interest Ratio, Financial Constraints and Corporate Investment

Extant prior literature on short interest has examined the impact of short interest ratio on firm’s expected stock returns and bond returns. However, the current literature does not examine the direct impact of short interest ratio on the firm’s real investment policy. We bridge this gap in the literature by integrating literature on short interest, and on equity mis-valuation and investment. Using a sample of S&P 1500 non-financial firms for the period of 2003-2015, we study the impact of short interest ratio on corporate investment viz. capital expenditures and intangible investment. Consistent with Polk and Sapienza (2008) our results support that equity overvaluation has significantly positive impact on capital expenditures through direct investment catering. Further, our results support that equity mis-valuation positively influences capital expenditures indirectly through the equity issuance channel. We find that the direct effect through investment catering dominates the indirect effect of equity issuance channel. The overall results are robust to various model specifications and corrections for endogeneity.