Short-selling and cost of equity: evidence from China |
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Authors: | Ning Hu Siqi Lu Tao Ma Jianfang Ye |
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Affiliation: | 1. School of Accountancy, Southwestern University of Finance and Economics, Chengdu, China;2. School of Accountancy, Shanghai University of Finance and Economics, Shanghai, China;3. Rawls College of Business, Texas Tech University, Lubbock, TX, USA;4. Institute of Accounting and Finance, Shanghai University of Finance and Economics, Shanghai, China |
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Abstract: | In this study, we take advantage of the gradual lifting of the short-selling ban in China and find that firms affected by the lifting of the ban experience a lower cost of equity. In addition, the affected firms also incur less earnings management, higher market liquidity and higher investment efficiency. Further evidence shows that firms’ cost of equity increases after their stocks are no longer eligible for short selling. Our inferences are robust to alternative measures of cost of equity, and to using a propensity score-matched sample. Our study contributes to the literature by providing evidence that short sellers play a monitoring role in the Chinese stock markets and sheds light on the benefits of short selling in emerging markets. |
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Keywords: | Chinese stock markets Cost of equity Difference-in-difference Short selling |
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