Does short selling discipline managerial empire building?

Abstract

This paper explores the discipline effect of short selling on managerial empire building. Employing short-selling data from 2002-2011, we document a negative association between the stock lending supply and the subsequent abnormal capital investment. We also find a positive association between the lending supply and the mergers and acquisitions announcement returns of acquiring firms. Firms with higher lending supplies also have higher Tobin’s Q in the subsequent year. In addition, the discipline effect is stronger for firms with higher managers’ wealth-performance sensitivity and with lower financial constraints, and for stock-financing acquisition deals. Alleviating the endogeneity concern, our multivariate difference-in-difference analysis shows that the lending supply is a more effective discipline force for firms that are in the Regulation SHO-Pilot Program during 2005 to 2007.