Enemy at the Gates: The Effect of an Increase in the Short Selling Threat on Corporate Social Responsibility
We test for a causal relationship between an increase in the short selling threat and Corporate Social Responsibility (CSR). Building on the risk-management perspective of CSR, we argue that when firms face an increase in the short selling threat, they improve their CSR performance. We further theorize that the level of stock held by short-term oriented institutional investors, the state of a firm’s financial health and the past levels of CSR moderate the relationship.
To test our hypotheses, we use the exogenous increase in the threat of short selling caused by the SEC’s Pilot Program under the Regulation SHO in 2004 in which the SEC lifted short-selling restrictions for a randomly selected subset of Russell 3000 firms. Results from difference-in-difference analyses lend support to our hypotheses.