Short-Selling Constraints And Corporate Payout Policy

This study shows that managers adjust corporate payout policies to counteract intensified short-selling pressures following the removal of a short-selling constraint. We use a controlled experiment, the Regulation SHO pilot program, to find that changing the short-selling rule brings small companies to increase cash dividends, but not to repurchase more shares. Because paying dividends is costly, it is acknowledged as a more reliable signal of stock undervaluation than share repurchase. While our evidence suggests that companies select this payout strategy to deter predatory short sellers, it also shows that a short-selling activity has a causal effect on corporate payout decisions.