Enemy at the Gates: Short-selling and Firm Performance on Corporate Social Responsibility - Evidence from a Natural Experiment

In this paper, we test for a causal relationship between short-selling and firms’ performance on Corporate Social Responsibility (CSR). To establish causality, we use the exogenous variation in short-selling restrictions induced by the Pilot Program under Regulation SHO of 2004. The Pilot program decreased the costs of short-selling for randomly selected subset of firms which resulted in an increase in the threat of short-selling for these firms. Results from a sample of U.S. firms for the years 2002 - 2006 suggest that an increase in the likelihood of being subject to short-selling increases firm performance on CSR. We further test how the temporal orientation of firms’ institutional owners and different level of firms’ financing constraints moderate the relationship between short-selling and firm performance on CSR.