CEO confidence matters: the real effects of short sale constraints revisited

Juwon Jang () and Eunju Lee ()
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Juwon Jang: Nichols College
Eunju Lee: University of Massachusetts Lowell

Review of Quantitative Finance and Accounting, 2024, vol. 62, issue 2, No 7, 603-636

Abstract: Abstract This paper investigates the role of managerial biases in the real effects of limits to arbitrage. In a natural experiment setting with Regulation SHO, we find that the lifting of short sale constraints leads to a significant decrease in CEO confidence for pilot firms, and this result is more pronounced for pilot firms with financial constraints and stronger corporate governance. We further find that the real effects of Regulation SHO documented in the literature are primarily driven by CEOs with low confidence. Diffident CEOs of the pilot firms tend to decrease corporate investments, reduce earnings management, and improve social performance and employee relations following the removal of short sale constraints. Overall, we identify CEO confidence as a behavioral channel through which capital market frictions influence corporate decisions and CEO investments.

Keywords: CEO confidence; Short sale constraints; Corporate investment; Earnings management; Corporate social responsibility (search for similar items in EconPapers)
JEL-codes: G10 G18 G30 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1007/s11156-023-01215-7

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