Short-Sale Constraints and Corporate Investment

Xiaohu Deng, Vishal Gupta, Marc L. Lipson, and Sandra Mortal

In a sample of non-US regulatory regime shifts we find that expanded short selling is associated with stock price declines, reductions in capital expenditure, and lower asset growth. In a reversal of results found for US stocks in a study of Regulation SHO by Grullon, Michenaud, and Weston (2015), our results are stronger for large firms than for small firms. We also show that this investment effect is stronger for firms that previously relied on outside financing. Our results suggest short-sale policies affect corporate investment and that this effect is not driven by capital constraints.