Short selling and corporate diversification in emerging markets: Insights from controlling shareholder tunneling

Employing the staggered removal of short selling restrictions as a series of quasi-exogenous shocks and using a difference-in-differences (DiD) research design, we examine the causal ef-fect of short selling on corporate diversification in the context of China. We find that short selling has a negative effect on firms' diversification. The channel tests reveal that short selling disci-plines controlling shareholders' tunneling and consequently reduces firms' diversification. Further analyses shows that the negative effect is more pronounced for non-SOEs, for firms with lower institutional holdings and during times of industry distress. Finally, we also rule out alternative explanations that may drive our main findings. Our study provides new insights into how short selling shapes corporate diversification in emerging markets.