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Margin Trading and Short Selling and Firm Innovation:An Analysis based on the Perspective of Both Quantity and Quality
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TitleMargin Trading and Short Selling and Firm Innovation:An Analysis based on the Perspective of Both Quantity and Quality  
AuthorHao Xiangchao,Liang Qi and Li Zheng  
OrganizationNanKai University; Tianjin University Of Finance & Economics;; 
Key WordsMargin trading and short selling; Innovation quality; Idiosyncratic risk; Corporate governance 
AbstractThis paper empirically examines the impact of margin trading and short selling on the quantity and quality of firm innovations. To address the endogeneity, this paper first use propensity score matching approach to match an equal number of firms whose stocks are not eligible for credit trading for firms whose stocks are eligible for credit trading, and then construct a general difference-in-differences model. The first main finding is that short selling is associated with the increase of both innovation quantity and quality, while margin trading is associated with the decrease of both of them. In the case of margin trading accounting for almost all the credit trading, the negative impact of margin trading dominates the positive impact of short selling, hence impeding firm innovations. This finding holds for controlling the bias of matching approach, the impact of state ownership, using alternative innovation proxies and expanding the event window. This paper further finds that margin trading and short selling affect innovation not only through corporate governance but also information mechanism. Finally, this paper also finds that firms eligible for credit trading respond to the combined impacts of margin trading and short selling by creating more patent applications but sacrificing patent quality, consequently lowering innovation quality. 
Serial NumberWP1306 
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