Can the Short-Selling System Restrain Corporate Financial Risk?

Abstract

This paper explores whether the margin trading and shortselling mechanism can suppress corporate financial risk (Li et al., 2024). Using a sample of Chinese A-share listed firms from 2010 to 2023, we adopt the multiperiod difference-in-differences (DID) method to test the influence, moderating mechanisms and transmission paths of the short-selling mechanism on financial risk. The results indicate that: first, the short-selling mechanism notably mitigates corporate financial risk by restraining managerial opportunism and improving financial decisions (Mishra et al., 2024). Such results remain robust after replacing dependent variable, tail winsorization and placebo test. Second, corporate financial traits positively moderate the risk-mitigating impact of short-selling. Third, the inhibition effect shows significant heterogeneity, which is more evident in non-state-owned enterprises and firms with high information transparency (Xu & Lv, 2024). Fourth, the short-selling mechanism functions mainly through reducing agency costs and improving information disclosure quality, both of which act as partial mediators. This study enriches existing literature on capital market institutional governance and provides reliable empirical evidence for policy formulation.