Can Short Selling Restrain Tunneling by Major Shareholders?

Yaqi Zhang

doi:10.54691/ezzcdj89

Authors

Yaqi Zhang Guangdong University of Petrochemical Technology, Maoming, Guangdong, China

DOI:

https://doi.org/10.54691/ezzcdj89

Keywords:

Short Selling System; Tunneling by Major Shareholders; External Supervision.

Abstract

Taking the tunneling behavior of major shareholders of Chinese listed companies as the research entry point, this paper systematically examines the external governance effect of the short selling system on restraining such tunneling activities. After the introduction of the short selling system, short sellers can identify clues of major shareholders’ tunneling by virtue of their superior information mining capabilities. Short selling transactions will trigger stock price declines, which increase the magnitude of major shareholders' wealth losses, control rights risks and regulatory costs arising from tunneling. When the benefits of tunneling fail to offset the above-mentioned losses, the short selling mechanism can effectively curb tunneling behaviors. The empirical results of this study support the above logical inference. Moreover, the restraining effect is more pronounced in enterprises featured with weak industry competition and insufficient media supervision. In terms of mechanism, short selling exerts governance effects by improving the quality of information disclosure and intensifying regulatory inquiries. This research demonstrates that the short selling system serves as a vital external governance tool, which can effectively contain the expropriation of interests by major shareholders and protect the rights and interests of minority shareholders.

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