Does the threat of short selling discipline management? Evidence from default risk changes around regulation SHO

Keming Li, Takeshi Nishikawa and Ramesh P. Rao

Journal of Financial Markets, 2025, vol. 73, issue C

Abstract: We document a significant reduction in default risk for the pilot firms relative to non-pilot firms during the Reg SHO period. This effect is more pronounced for firms whose default risk was high prior to the program. We also find that the pilot firms adopt greater accounting conservatism during the program and experience improved bond contracting through reductions in covenant usage in newly issued bonds. Lastly, we find significant improvements in investment efficiency and cash holding value for the pilot firms. Our combined evidence supports the disciplinary role of short selling in the financial markets.

Keywords: Short sale; Regulation SHO; Accounting conservatism (search for similar items in EconPapers)
JEL-codes: G30 G38 M41 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finmar:v:73:y:2025:i:c:s1386418124000788

DOI: 10.1016/j.finmar.2024.100960

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