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Short‐selling and cost of equity: evidence from China
Author(s) -
Hu Ning,
Lu Siqi,
Ma Tao,
Ye Jianfang
Publication year - 2020
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12540
Subject(s) - equity (law) , cost of equity , china , business , market liquidity , implicit cost , monetary economics , earnings , stock (firearms) , earnings management , financial economics , economics , finance , cost of capital , accounting , microeconomics , total cost , political science , law , profit (economics) , mechanical engineering , engineering
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.