Can short selling be effective in curbing financial risk?

Abstract

This study takes Chinese A-share listed companies from 2009 to 2023 as the research sample to empirically study the relationship between short selling and financial risk. The research results show that as the intensity of short selling transactions increases, the financial risk of enterprises decreases accordingly. At the same time, the test of the moderating effect reveals that compared with enterprises with low equity concentration, the short selling mechanism helps to reduce the financial risk of enterprises with high equity concentration; compared with state-owned enterprises, the short selling mechanism helps to reduce the financial risk of non-state-owned enterprises. Through PSM tests, instrumental variable tests, and empirical research, the above research findings are supported. Through the test of the mediating mechanism, it is found that the short selling mechanism reduces financial risk by alleviating agency conflicts and improving the quality of corporate information disclosure.