Deregulation of short selling and corporate cash dividend policy: A quasi-natural experiment from China

This study takes China’s short selling deregulation as a quasi-natural experiment, employs a sample of Chinese A-share listed firms from 2007 to 2017, and tests the impact of a short selling pilot on firms’ cash dividends using a difference-in-differences model (DID). We find that China’s short selling pilot significantly increases the pilot firms’ cash dividends. The mechanism test shows that short selling can improve the pilot firms’ cash dividends by playing a corporate governance role to restrain dual agency costs such as management fees and major shareholders’ tunneling. Furthermore, we identify that short selling restrains the behavior of “large stock dividends” and increases the cash dividends of “large stock dividends” firms. Moreover, the governance effect of short selling is complementary to the external governance environment. The higher the degree of marketization and government quality, the more significant the governance effect of short selling to increase the pilot firms’ cash dividends. This study enriches not only the research related to cash dividends in emerging economies, but also provides new empirical evidence for the evaluation of China’s short selling deregulation and offers valuable lessons to other emerging economies.