Short Selling And Tax Avoidance: An Empirical Analysis Based On China's Listed Companies

China Securities Regulatory Commission launched the pilot of margin trading in 2010,which removed the short constraint in China's capital market.Short selling which plays a crucial role in the chain of financial innovation has been proved not only can increase the effectiveness of the market,promote the market price discovery function,but also affect the micro-enterprise decision-making,and discipline the self-interest behavior of managers.However,when faced with the crash in 2015 and under the pressure of the media and the external investors,the SRC began to condemn the short seller and adopted a series of restrictions on short selling.The SRC's attitude towards short sellers reflects the issue of the policy assessment on the margin trading.This assessment ignores the impact of short selling on micro-firm behavior.This paper explores the adjustment of corporate taxation in the context of the margin trading and provides further evidence for the discussion of the effectiveness of the policy.Regarding the margin trading as a quasi-natural experiment,this paper,use the Difference-in-Differences method and the firm-level data of A-share listed company over 2006 to 2015,investigates the impact of short selling on corporate tax avoidance.First,I find the tax avoidance of the firm that on the short position is significantly decline after the pilot implementation.It suggests that the short selling can discipline the self-interest behaviors of managers.I further find that this impact is more pronounced for firms from region with higher developed financial market and more investor protection,which suggests that short selling has become an alternative to the lack of external governance.To mitigate some endogenous concern,such as the listed companies those avoid less taxes are more likely to been chosen to the short position,we first use the propensity score matching construct a control group for the firms that on the short position and conduct a DID estimates.Second,I use the securities balances as the proxy of short selling and Exchange-Traded Funds ownership as an instrumental variable.So,we get a casually effect between the short selling and the decline of corporate tax avoidance.Finally,I find short selling can reduce the tax avoidance through decrease the information asymmetry.