Short-selling restrictions and firms' environment responsibility

We examine the effect of short selling on firms' environmental pollution control behavior. Using novel data from Chinese listed firms, we demonstrate that when the short selling of stocks is permitted, the respective firms invest more in pollution protection. Consequently, ex ante threats to short selling could potentially explain firms' investment in pollution protection. In contrast, we do not find a positive relation between margin trading and firms' pollution protection expenses. We further discover that the effect of short selling is more pronounced in firms with lower institutional ownership and lower market competition. These findings shed light on the role of short sales in pollution abatement.