Study On Corporate Governance Effect Of Short Selling

On March 31,2010,China’s capital market officially launched margin trading,which means that China’s capital market has finally ended the long-standing era of“unilateral market” and ushered in the mode of credit trading.So far,the stock exchange has expanded the list of underlying stocks six times.As of the most recent one on August 19,2019,the number of underlying stocks available for margin trading has reached 1,600,accounting for about 40% of the total number of A-share listed companies.The launch of margin trading system marks the beginning of the short selling in China,and its impact has become increasingly apparent as the range of underlying stocks continues to expand and the scale of short selling transactions increases.Many studies have shown that short selling can act as an external governance mechanism and can play a governance role on firm behavior.While executives are decision-makers of corporate behavior,few studies have further explored how short selling motivates and disciplines executives to give play to the corporate governance effect.To this end,this paper examines the governance effect of short selling from two aspects,namely executive compensation contract and dismissal systems,using DID models against the background of the gradual deregulation of short selling in China.The specific research is as follows:(1)Based on executive pay-for-performance sensitivity and salary stickiness,this paper examines the impact of the short selling on the effectiveness of executive monetary compensation contract;(2)Considering that changes in executive compensation can cause changes in the pay gap,this paper further examines the impact of the short selling on the pay gap between executives and employees and the gap between executives,as well as the impact of the resulting changes in pay gap on corporate value;(3)In addition to explicit compensation,the executive compensation system also includes implicit compensation based on perks,which is also an important way for executives to grab rent.For this reason,this paper also examines the governance effect of the short selling on executives’ excessive implicit compensation(or known as implicit corruption);(4)Finally,this paper also examines whether the short selling can improve the effectiveness of the CEO dismissal policy,that is,whether the short selling can improve the sensitivity between CEO dismissal and performance.This paper draws the following conclusions through theoretical analysis and empirical studies:(1)Short selling can significantly improve pay-for-performance sensitivity.In particular,when corporate performance deteriorates,the short selling can effectively improve the pay-for-performance sensitivity,thus effectively decreasing the stickiness of compensation.Furthermore,if the companies are located in the area with low level of product market competition and low level of the market index,the governance effect of short selling on executive compensation contract is more significant,making up for the lack of other external governance.Moreover,the governance effect of short selling can be restrained by strong management power,and only when the management power is weak,the short selling can play a role of corporate governance.(2)Short selling makes the pay gap between executives and employees larger,and the increased part is conducive to the improvement of firm value,which reflects the efficiency incentive of the pay gap.At the same time,under the pressure of short selling,the pay gap between executives is reduced,and the reduced part can also improve firm value,which reflects the equity incentive of the pay gap.The further heterogeneity tests show that the efficiency incentive of the pay gap between executives and employees as a result of short selling mainly exists in non-state-owned enterprises and enterprises in areas with a higher degree of marketization,while the equity incentive of the pay gap between executives because of short selling is obvious in state-owned enterprises and enterprises in areas with a lower marketization degree.(3)Short selling can effectively restrain the hidden corruption of executives,significantly reducing the level of perks,especially excessive perks,and the governance effect of short selling on the hidden corruption of executives is particularly strong in state-owned enterprises.Furthermore,marketization as a kind of external governance mechanism has a “complementary effect” on the short selling mechanism,which means only in highly market-oriented areas can the short selling mechanism play its governance role.However,there is a “substitution effect” between short selling and internal corporate governance.That is,when internal corporate governance fails,short selling can control the executive hidden corruption instead.(4)Compared with companies that cannot be short sold,short-sellable firms under short selling pressure will incorporate stock returns into the evaluation system for dismissed CEOs,thus increasing the sensitivity of CEO dismissals to market performance,but the sensitivity of CEO dismissals to accounting performance does not increase significantly.Furthermore,the CEO dismissals under short selling pressure significantly improve companies’ accounting performance and market performance,but the CEO dismissals in the companies without short selling pressure have no significant effect on companies’ market performance.In addition,there is no significant difference between the performance improvement caused by the CEO dismissals due to the short selling pressure and the performance improvement caused by the CEO dismissals in the company that cannot be short sold.The research in this paper has the following theoretical and practical significance.As for theoretical significance,the short selling,as an effective external governance mechanism,has gradually attracted the attention of scholars.However,existing research mainly focuses on the governance effect of short selling on enterprise earnings management,investment activities,and information disclosure,but few studies investigate the governance effect of short selling on executive compensation and dismissal policy.To this end,this paper studies the external governance role of short selling from the perspective of the company’s executive compensation contract and dismissal policy,providing a useful supplement for the research on the economic consequences of short selling and improving the relevant research on the external governance of the company.At the same time,this paper finds that short selling can motivate and discipline executives by enhancing the effectiveness of executive compensation contract and dismissal policy and analyzes the ways of short selling to govern executive agency behavior,opening the black box of short selling to discipline corporate behavior.As for practical significance,the conclusions of this paper make a micro interpretation of the implementation effect of China’s margin trading system,explores the practical significance of the short selling from the perspective of the company,and provide a new empirical basis for further promoting the short selling in China,which is beneficial to promoting the reform of China’s financial system and the healthy development of the capital market.