Short selling and future cash flow predictability of capital investment: Evidence from Australia

Haiyan Jiang and Jing Jia

Journal of Contemporary Accounting and Economics, 2021, vol. 17, issue 1

Abstract: This study investigates whether short selling, as a market mechanism, has a disciplining function for firms’ investment efficiency, measured through the association between capital investment and future cash flows. Using a sample of large Australian listed firms, we find that short-selling activities improve the positive relationship between capital investment and future cash flow and that this effect is mainly driven by firms with a risk management committee (RMC). Additional analyses show that the disciplining function of short selling for firms’ investment efficiency varies with (i) the level of firms’ financial constraints, (ii) firms’ life cycle or (iii) CEO share incentives. The main results are robust to a batch of endogeneity tests to address the potential self-selection bias and the concern about reverse causality.

Keywords: Short selling; Investment efficiency; Future cash flows; Risk management; Financial constraints; Life cycle (search for similar items in EconPapers)
Date: 2021
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jocaae:v:17:y:2021:i:1:s1815566920300382

DOI: 10.1016/j.jcae.2020.100224

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