From deregulation to sustainability: The disciplining role of short selling pressure on ESG greenwashing

We examine the impact of short-selling pressure on firms' engagement in greenwashing. To establish a causal effect, we exploit the staggered deregulation of short selling in the Chinese stock market. Historically, short selling was prohibited in China, and this deregulation serves as a quasi-natural experiment that exogenously increases short selling pressure. We posit that short sellers act as external monitors, enhancing firms' information environment and reducing their incentives for greenwashing. Consistent with this prediction, we find that when a firm becomes eligible for short selling, its greenwashing activities significantly decrease. This effect is more pronounced in firms with less transparent information environments, stronger motivations for greenwashing, and better alignment between management and shareholder interests. Overall, our findings highlight the role of short sellers in disciplining greenwashing and enhancing transparency to stakeholders.