Short-selling restrictions and firm management decisions

Abstract

This research seeks to study the effects of short-selling restrictions - caused by high fees in the stock loan market - on corporate financing. Specifically, we analyzed two distinct variables to observe companies’ financing decisions: the first was the companies’ free shares number; the second was their level of loans and financing. Thus, in the first analysis, we sought to identify whether companies were trying to take advantage of short-selling restrictions to issue new shares or sell those held in treasury. Similarly, our second analysis examined whether companies changed their indebtedness level in response to this market moment. To observe exogenous variations in loan fees, we used a research design based on a tax arbitrage carried out by investment funds in the Brazilian capital market. Such arbitrage increased the demand for stock lending, resulting in inflationary pressures on the fees paid in the loan market. Hence, our empirical strategy employed an instrument correlated with the volume of arbitrage in the loan market to isolate exogenous shocks in loan fees and, thereby, estimate the effect of these fees on corporate financing. However, our estimates did not identify any significant effects, regardless of the outcome variable used to represent corporate financing.