Can short selling improve internal control? An empirical study based on the difference-in-differences model

Based on pilot margin trading in China, this study examines how short selling affects internal control quality in listed firms. Using the difference-in-differences approach, we find that compared with control firms, firms that are eligible for short selling significantly improve their internal control after they are designated as underlying securities. We consider the effects of state ownership and external auditors. The improvement in internal control is only significant for non-state-owned firms and firms audited by non-Big 4 auditors. These findings indicate that short selling can improve firms' internal control and play a role in their corporate governance.