Short Selling and Financing Constraints: Evidence from Chinese Listed Firms

Abstract

Since the pilot program of margin trading and securities lending system was launched in China in 2010, a standardized short selling mechanism has been formed through gradual expansion. It has become an important institutional arrangement for improving the information environment and strengthening external governance of the capital market. Faced with widespread financing constraints among domestic firms, A-share listed companies in China over the period 2015–2024 are selected as research samples. As a quasi-natural experiment is constructed based on the phased expansion of margin trading and securities lending, a staggered DID estimation approach is adopted. Systematically investigated herein are how short selling rules affect corporate financing constraints, along with its underlying transmission paths. Estimated outcomes demonstrate several key findings. To start with, the adoption of short selling policies greatly eases financing difficulties faced by listed corporations. The above outcome is still reliable after we take corporate attributes, firm and year fixed effects into consideration. Next, tests on transmission paths prove that short selling lowers information gaps and agency problems. By enhancing corporate information openness and tightening external supervision, it effectively reduces firms’ financing difficulties. The two paths both deliver significant partial mediation. Third, heterogeneous regression results present that short selling plays a stronger mitigating role in private firms, yet its effect is not statistically meaningful within state-owned enterprises. It implies that the external monitoring capacity of short selling functions more effectively in environments featuring serious financing prejudice and insufficient regulatory constraints. Fourth, the core findings remain valid after a series of robustness tests, including placebo test, PSM-DID, replacement of explained variables and adjustment of sample intervals. This paper expands the research scope of the economic consequences of short selling rules, while supplementing prior studies on drivers of financing constraints. It also provides empirical evidence for regulators to optimize the securities credit trading framework, improve corporate financing environment and boost resource distribution performance within the capital market.