Deregulation on Short Sale Constraint, Corporate Investment and Valuation
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| Title | Deregulation on Short Sale Constraint, Corporate Investment and Valuation
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| Author | Jin Qinglu,Hou Qingchuan and Xie Yaqian |
| Organization | Shanghai University of Finance and Economics |
| Email | acjql@mail.shufe.edu.cn；hou.qingchuan@mail.shufe.edu.cn；243810224@qq.com |
| Key Words | Short Sale, Investment, Corporate Option Valuation |
| Abstract | Investors can sell short on designated stocks on China stock market since March 2010 when the CSRC relieved the short sale constraint. It is accepted that short sale can help to incorporate bad news into stock price more quickly so as to reduce the overvaluation (Miller, 1977). This study investigates the impact of short sale on corporate investment and stock valuation. When the investment opportunity declines, if the corporate does not reduce or cut-off the investment, the investors will take advantage of the “bad news” and short sell the stock. The interests of controlling shareholders will be impaired when the stock price declines. Therefore, they will have motivation to monitor the managers to reduce the inefficient investment. Accordingly, the relief of short sale constraint will make the corporate investment respond more efficiently to the declined investment opportunity. According to the valuation theory based on real option (Zhang, 2000), the value of put option will be incorporated into stock price when the investment is reduced or cut-off. However, short sale has no impact on investment or call option when the investment opportunity improves. The empirical evidence supports the above arguments. |
| Serial Number | WP877 |
| Time | 2015-05-19 |
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