Do Short Sellers Affect Corporate Innovation? Evidence from a Policy Experiment

Abstract We examine the effect of short sellers on corporate innovation. To establish causality, we use a policy experiment that exogenously removes the short-selling constraint for a randomly selected subsample of Russell 3000 firms. We find that innovation quality, value, and efficiency of treatment firms improve significantly more than those of control firms surrounding the policy shock. The exposure to patenting-related litigation initiated by short sellers is a plausible underlying mechanism through which short sellers discipline firm managers and enhance innovation. Our paper provides new insights into an unintended real effect of short sellers, specifically their improvement of technological innovation. (JEL G14, G18, G34, K22, O31, O32) Received December 10, 2018; editorial decision February 12, 2023 by Editor Andrew Ellul. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.