The Impact of Short Selling on the Readability of Corporate Financial Reports

Abstract

As a significant external governance force in capital markets, can the short-selling mechanism effectively prompt enterprises to enhance the quality of textual information disclosure in their financial reports? Using data from Chinese A-share listed companies between 2013 and 2023, this study constructs a Difference-in-Differences (DID) model to empirically examine the causal effect of the short-selling mechanism on the readability of corporate financial reports and its operational channels. Findings reveal that the introduction of short selling significantly enhances financial report readability by effectively reducing textual complexity and ambiguity. This effect is particularly pronounced in non-state-owned enterprises-where information environments are weaker and agency problems more acute-and in firms receiving lower analyst attention. These conclusions remain robust across a series of stability tests. This study provides micro-level textual disclosure evidence illuminating short sellers' corporate governance roles, offering significant policy implications for regulators pursuing deeper market institutional reforms.