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Short Selling Deterrent, Corporate Governance and Hidden Corruption of Executives

【Authors】
TONG Aiqin, MA Huixian
【WorkUnit】
Tongji University, 200092.
【Abstract】

This paper investigates the governance effect of the deterrent of short selling on the hidden corruption of executives and analyzes the governance effects of the short selling in different corporate governance environments, taking the step-by-step expansion of margin trading in China as a quasi-natural experiment. The results show that the short selling deterrent can effectively restrain the hidden corruption of executives, significantly reducing the level of perks, especially excessive perks, and the governance effect of short selling on the hidden corruption of executives is particularly strong in state-owned enterprises.Furthermore, we analyze the mechanism of short-selling, and find that the short-selling strengthens the supervisory role of external investors and shareholders, and increases the proportion of executive equity compensation, which makes shareholders share the risk of stock price decline caused by short-selling with executives, thus effectively restraining the hidden corruption of executives. In addition, marketization as a kind of external governance mechanism has a “complementary effect” on the short-selling mechanism, which means only in highly marketoriented areas can the short-selling mechanism play its governance role. However, there is a “substitution effect” between short selling and internal corporate governance. That is, when internal corporate governance fails, short selling can control the executive hidden corruption instead. This paper not only broadens the relevant research on the governance effect of short selling mechanism, and provides micro empirical evidence for the deregulation of margin trading in China, but also provides new ideas for the governance of executive corruption.

 

JEL:G14, G34

【KeyWords】
Short Selling, Deterrent, Hidden Corruption, Ownership, Corporate Governance