Short Selling and Total-Factor Productivity: Evidence from a Quasi-Natural Experiment in China

This study examines the effect of short selling on total-factor productivity (TFP) using China's short-selling pilot program as a quasi-natural experiment. Short-selling significantly improves TFP, and this positive effect is mainly driven by improvements in firms' innovation ability and resource-allocation efficiency. The results are robust to potential endogeneity using propensity-score matching, a placebo test, and exogenous shocks. Further, the positive effect is more pronounced when external governance mechanisms (i.e. market competition and institutional investor supervision) are weak.