The Impact of Shorting Mechanism on Cash Holding Levels and Asset Utilization of Firms: A Case Study of Luckin Coffee's Shorting Incident

Abstract

this study takes Muddy Waters' shorting of Luckin Coffee as a typical case, and explores the impact of the shorting mechanism on firms' cash holding level and asset utilization from the perspectives of risk resistance and agency problems. By analyzing the financial data before and after the shorting of Luckin Coffee through the event study method, it is found that the shorting mechanism prompts firms to increase their cash holding level and strengthen their risk resistance by enhancing the pressure of market surveillance, and forces them to alleviate the internal agency problem and optimize their asset utilization rate. this study further suggests that firms need to balance high cash risk resistance and efficient asset utilization, and regulators need to improve the disclosure rules of shorting information to prevent malicious shorting.