How does the Merger and Acquisition’s Goodwill Response to the Short-Selling Scheme in China

This study examines how China's short-selling scheme affects goodwill recognized in mergers and acquisitions. Using the short-selling pilot program as a quasi-natural experiment, we employ a staggered difference-in-differences (DID) model based on Chinese A-share listed companies from 2007 to 2020. The results show that the introduction of short selling significantly reduces both the carrying value of goodwill and newly recognized goodwill arising from M&A transactions. These findings remain robust after a series of robustness tests, including parallel trend analysis, entropy balancing matching, and alternative measures of short-selling intensity and goodwill. Further analyses reveal that the governance effect of short selling is more pronounced in firms with severe agency conflicts, weaker regulatory environments, and lower disclosure pressure regarding goodwill-related critical audit matters. The evidence suggests that short selling functions as an effective external governance mechanism by constraining managerial opportunism in acquisition decisions and goodwill accounting, thereby improving the quality of goodwill fair value estimates. This study extends the literature on short selling and goodwill by providing new evidence that market-based governance can mitigate M&A goodwill overvaluation and enhance its quality. The findings also offer important policy implications for regulators seeking to strengthen capital market governance and enhance company’s M&A quality to facilitate investors’ decision-making.