Short selling and tunneling through intercorporate transfers: evidence from China

Using the staggered introduction of the margin purchase and short selling pilot program in China since 2010, we find that pilot firms reduce their tunneling activities compared to non-pilot firms after they are selected for the program, especially when controlling shareholders hold tradable shares and when there is no foreign institutional ownership. Analyses also confirm that short sellers do target firms with severe tunneling activities. Additionally, we find that pilot firms demonstrate improved operating performance and higher market valuation in subsequent years. Our study implies that market mechanisms could effectively curb expropriation of minority shareholders by controlling shareholders. © 2025 City University of Hong Kong and National Taiwan University.