The signalling effect of corporate social responsibility reporting: evidence from short selling

Using exogenous regulatory changes that have gradually removed short-sale restrictions in China's stock exchanges, we examine how such deregulation influences firms’ corporate social responsibility (CSR) reporting. Our findings indicate a significant improvement in the calibre of CSR reporting among firms designated as qualified for short selling in a deregulation pilot program (pilot firms) compared to non-pilot firms. Moreover, our empirical evidence shows that the improvement in CSR reporting practices is greater for pilot firms experiencing stronger downward price pressure, negative earning news, higher bankruptcy risk, greater ownership concentration, and those classified as state-owned enterprises. These results demonstrate that firms susceptible to price declines from short selling utilize CSR reporting as a visible and credible signal to safeguard and enhance corporate reputation, garnering increased stakeholder support.