Can Short-Selling Mechanisms Improve Corporate ESG Performance?

Abstract

This study examines whether the imposition of short-selling pressure acts as a catalyst for optimizing corporate ESG performance in China’s capital market. Using data from Chinese A-share listed firms from 2009 to 2024, this paper scrutinizes the governance outcomes of short-selling mechanisms under the margin trading and securities lending systemOur empirical findings demonstrate that firms exposed to greater short-selling pressure exhibit significantly better ESG performance. This conclusion remains robust after a battery of endogeneity treatments and robustness checks. Further analysis suggests that this positive external effect is far more pronounced among private (non-state-owned) enterprises and those situated in environmentally sensitive (highly polluting) sectors. Mechanism analysis indicates that short-selling pressure improves ESG performance mainly through enhancing information transparency and strengthening governance constraints. By increasing external market discipline, short selling encourages firms to pay greater attention to long-term sustainability practices and non-financial risk management.Overall, this research enriches the existing literature on ESG frameworks and capital market governance by providing evidence from an emerging market context and highlighting factors shaping firms’ sustainability behavior.