Does Short-Selling Mechanism Inhibit Corporate ESG "Greenwashing"? Evidence from a Substantive Compliance Perspective based on the Expansion of Margin Trading and Short Selling System

Mohan Shen

doi:10.6981/FEM.202610_7(10).0007

Authors

Mohan Shen Tianjin Foreign Studies University, Tianjin, 300204, China

DOI:

https://doi.org/10.6981/FEM.202610_7(10).0007

Keywords:

Short-selling Mechanism; ESG Greenwashing; Non-operating Expenditure; Defensive Compliance; Difference-in-Differences (DID).

Abstract

Against the backdrop of increasing capital market attention to Environmental, Social, and Governance (ESG) performance, strategic "greenwashing" behaviors have severely compromised the quality of market information. Using a sample of Chinese A-share listed companies on the Shanghai and Shenzhen Stock Exchanges from 2009 to 2023, this paper treats the gradual expansion of the margin trading and short selling system as a quasi-natural experiment and constructs a multi-period difference-in-differences (Multi-period DID) model to systematically investigate the external forcing governance effect of capital market short-selling mechanisms on firms' substantive ESG compliance performance. Distinguishing itself from third-party macro ESG ratings that are susceptible to manipulation by greenwashing, this study innovatively adopts the proportion of non-operating expenditures (ESG_proxy) as an inverse proxy variable for non-compliance loopholes and marginal violations. The findings indicate that the external supervisory threat brought by deregulation of short selling exerts a market-based governance function, significantly suppressing firms' non-compliant and marginal violation expenditures, thereby substantively improving the ESG compliance performance of micro-entities. This conclusion remains highly robust after undergoing parallel trend tests and placebo tests. Heterogeneity boundary analysis reveals that the enhancing effect of short-selling deterrence on substantive ESG performance is more pronounced among non-state-owned enterprises and high-tech enterprises, suggesting a higher sensitivity among micro-entities facing tighter market constraints and possessing high reputation dependence. This study enriches the research on the non-financial governance effects of short-selling mechanisms and provides important policy insights for regulators to optimize the margin trading and short selling system and curb greenwashing behaviors.

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