Does capital market drive corporate investment efficiency? Evidence from equity lending supply

Hsin-Ju Stephie Tsai, Yuliang Wu, Bin Xu

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Abstract

The increased equity lending supply (ELS) in the equity loan market, available for short sellers to borrow, exposes a firm to greater short selling threats. Considering short sellers' strong incentives to uncover firm-specific information and monitor managers, we hypothesize that short selling threats, proxied by ELS, enhance corporate investment efficiency. We find that ELS significantly reduces managerial tendencies to underinvest (overinvest) especially for firms prone to underinvest (overinvest). The effect of ELS on investment efficiency is stronger for firms with higher information asymmetry and weaker corporate governance, confirming short sellers' role in mitigating information and agency costs. However, short selling risk weakens the effect of ELS. Our evidence is robust to endogeneity checks and suggests that corporate investment can be driven by a particular capital market condition: the amount of lendable shares in the equity loan market.
Original languageEnglish
Article number102042
JournalJournal of Corporate Finance
Volume69
Early online date23 Jul 2021
DOIs
Publication statusPublished - Aug 2021

Keywords

  • Corporate investment efficiency
  • Equity lending supply
  • Financial constraints
  • Short selling threats

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