Short-Selling and Financial Performance of SMEs in China: The Mediating Role of CSR Performance

Round 1

Reviewer 1 Report

Overall, the paper examines an interesting and important question. However, I have some major concerns about the paper.

1. Contribution. In the introduction, the authors do not do a good job in explaining why examining the effect of short selling on financial performance is important. Just being novel cannot sufficiently merit a publication at a quality journal. In addition, the authors need to better link why CSR is an effective machenism through which short selling affects firm performance. Also, it is notable that Gao, He, Wu (2019) demonstrate a relationship between short selling and CSR. Therefore, the authors' claim that there is no study examining the effect of short selling on CSR is not correct.
2. Diff-in-Diffs analysis. The DiD design in this paper is flawed. In the regression, the authors specify the variable of interest is Short X Treat, which is not wrong, but they should include Short and Treat in the regressions. Treat may be dropped due to year fixed effects, but in the estimation both variables have to be included otherwise the interaction term doesn't capture the causal effect of short selling. I notice that the authors claim that they are doing so following Beck, Levine, and Levkov (2010). I have carefully read Beck et al. (2010), and their identification is different from the authors'. In their paper, they adopt a multi-event staggered DiD. The authors may do the same thing by replacing the interaction term to a single treatment variable capturing both time-varying and cross-sectional variations of short selling eligibility. 
3. Sample. I suggest the authors present the distribution of SMEs that are eligible for short selling, e.g., how many SMEs are eligible for short selling, and how many are not. 
4. The Mediating Test. I am not convinced with the use of such mediating test to identify the channel of CSR. A better way is to partition the test-sample by ex-ante CSR (the CSR values in the fiscal year immediately before the firms are added to the short selling list), and then estimate the main DiD regrressions for low-CSR and high-CSR groups. If we find the results are coming through (more pronunced for) the Low-CSR group than we may say the short selling effect is coming through improving CSR performance. Please note that simply comparing the magnitude of the coefficients for different regressions is not rigorous to compare the effect for different groups. Ideally, we should observe the main variable of DiD (Treatment or Short x Treat depending on which specification the authors decide to go with) is statistically significant for low-CSR group, and not significant for high-CSR group.
5. Story line. The link between improved CSR performance and profitability (ROA) and growth (Tobin's Q) is still not quite clear. The authors need to spend time to justify why and how improved CSR contributes to improved firm performance. In addition, the authors need to discuss (even test) how short selling is supposed to affect CSR performance. 
6. Minor points. 
   1. In the regression equations, industry fixed effects are included but in the actual tables it is firm fixed effects instead of industry fixed effects. What is going on here?
   2. In Conclusion, the authors suggest there is xx firm-year observations. What does xx stand for?
   3. adjrsquare should be Adj-R sq. or Adj-R2. 
   4. The authors use past tense throughout the paper. It is better to use present tense. 
   5. The structure of the conclusion is a little messy. I suggest the authors go with what they do, what they find, and what the results suggest and tell us. You don't need to have a whole paragraph to explain the limitations. 

Author Response

Point 1: Contribution. In the introduction, the authors do not do a good job in explaining why examining the effect of short selling on financial performance is important. Just being novel cannot sufficiently merit a publication at a quality journal. In addition, the authors need to better link why CSR is an effective mechanism through which short selling affects firm performance. Also, it is notable that Gao, He, Wu (2019) demonstrate a relationship between short selling and CSR. Therefore, the authors' claim that there is no study examining the effect of short selling on CSR is not correct. 


 

Response 1: Thanks for the comment, as according to the comment amendment are done as highlighted in yellow font on page 5. The amendment of this section as followed:

 

“To avoid the threat of short-selling behaviors, corporate managers tend to improve the CSR performance in order to demonstrate their long-term corporate sustainability strategies. Based on the empirical evidence on US SHO regulation, X. Gao and Julian (2018) proposed that managing executives adopt CSR to defend against negative events such as short selling threats. Their results show that firms with high degree of short selling attacks will adopt CSR as public relation defence for downside risk of stock price. Likewise, Rusinova and Wernicke (2019) contend that when firms are confronted with an increased threat of short-sellers attempting to affect the stock price, managing executives increase their CSR performance in order to reduce the risk to the firm's stock price. The above studies show the link between short selling and CSR in the context of US, few studies focused on the empirical study of their relationship in developing countries, such as China”

 

However, the authors that reviewer mention was not included in original manuscript, I believe there is a misunderstanding.

 

Point 2: Diff-in-Diffs analysis. The DiD design in this paper is flawed. In the regression, the authors specify the variable of interest is Short X Treat, which is not wrong, but they should include Short and Treat in the regressions. Treat may be dropped due to year fixed effects, but in the estimation both variables have to be included otherwise the interaction term doesn't capture the causal effect of short selling. I notice that the authors claim that they are doing so following Beck, Levine, and Levkov (2010). I have carefully read Beck et al. (2010), and their identification is different from the authors'. In their paper, they adopt a multi-event staggered DiD. The authors may do the same thing by replacing the interaction term to a single treatment variable capturing both time-varying and cross-sectional variations of short selling eligibility.

 

Response 2: Thanks for the comment. Amendment done according the comment and highlighted in yellow. As suggested, the author used short, Treat and Short*Treat as independent variables and the result are still valid and significant. 

 

Point 3: Sample. I suggest the authors present the distribution of SMEs that are eligible for short selling, e.g., how many SMEs are eligible for short selling, and how many are no.

 

Response 3: Thanks for the comments. The reviewer comment/requirement were there in original manuscript. Here, I will be highlighting again in yellow on page number 9 in case the reviewer overlooked.  The distribution of SME as followed:

 

Industry	Total firms	Shortable firms	Non-shortable firms
Manufacturing	640	235	405
Leasing and commercial services	14	5	9
Civil engineering	7	1	6
Real estate	9	4	5
Wholesale and retail trade	23	14	9
Infrastructure	8	1	7
Transport and postal services	13	2	11
Animal husbandry	11	4	7
Health care	3	1	2
Construction	30	10	20
Software and information technology services	53	30	23
Internet and related services	10	0	10
Mining and washing of coal	6	3	3
Hospitality	1	0	1
Culture, sports and arts	5	0	5
education	3	1	2
Total	836	311	525

 

 

Point 4: The Mediating Test. I am not convinced with the use of such mediating test to identify the channel of CSR. A better way is to partition the test-sample by ex-ante CSR (the CSR values in the fiscal year immediately before the firms are added to the short selling list), and then estimate the main DiD regrressions for low-CSR and high-CSR groups. If we find the results are coming through (more pronunced for) the Low-CSR group than we may say the short selling effect is coming through improving CSR performance. Please note that simply comparing the magnitude of the coefficients for different regressions is not rigorous to compare the effect for different groups. Ideally, we should observe the main variable of DiD (Treatment or Short x Treat depending on which specification the authors decide to go with) is statistically significant for low-CSR group, and not significant for high-CSR group.

 

Response 4: Thanks for the comments. After the considering the reviewer input, we found that Baron and Kenny (1986) model is a method that have been used for mediating effect (Martinez‐Ferrero et al., 2020; Ouni et al., 2020; Zhang et al., 2014; Zou et al., 2021).

 

Point 5: Story line. The link between improved CSR performance and profitability (ROA) and growth (Tobin's Q) is still not quite clear. The authors need to spend time to justify why and how improved CSR contributes to improved firm performance. In addition, the authors need to discuss (even test) how short selling is supposed to affect CSR performance

 

Response 5: Thanks for the comments. Amendment was done according to the comment and were highlighted with yellow colour on page 10 to 11. The amendment of this section as followed:

 

CSR performance is positively correlated with Tobin’s Q, ROA and short-selling deregulation. Firm size and growth are positively correlated with firm financial performance, short selling deregulation and CSR, while Firm leverage is negative to all of them.

 

Based on the three-step model of Baron and Kenny (1986), table 6 demonstrates the regression models to test hypotheses. Model 1 illustrates findings that short-selling deregulation significantly improve financial performance proxied by Tobin’s Q and ROA within 1% significant level, indicating that the hypothesis 1 is supported (Wang & Zhang, 2020). The results unfold that the appearance of short-selling can inspire better performance of listed SMEs in China, supporting the external monitoring view of short-selling mechanism

 

Point 6: In the regression equations, industry fixed effects are included but in the actual tables it is firm fixed effects instead of industry fixed effects. What is going on here?

 

Response 6:  Thanks for the comments. There was an error that the author overlooked and the amendment is done. The author changed industry fixed effects to firm fixed effects.

 

Point 7: In Conclusion, the authors suggest there is xx firm-year observations. What does xx stand for?

Response 7: Thanks for the comments. There was an error that the author overlooked and the amendment is done. The authors rewrite the conclusion section as followed comments point 10.

 

Point 8: Adj R-square should be Adj-R sq. or Adj-R2. 

Response 8: Thanks for the comments. There was an error that the author overlooked and the amendment is done. The author changed Adj R square.

 

Point 9: The authors use past tense throughout the paper. It is better to use present tense. 

Response 9:  Thanks for the comments. Amendment done according to the comment.

 

Point 10: The structure of the conclusion is a little messy. I suggest the authors go with what they do, what they find, and what the results suggest and tell us. You don't need to have a whole paragraph to explain the limitations. 

 

Response 10: Thanks for the comments. Amendment done according to the comment and were highlighted with yellow colour on page 15. The amendment of this section as followed:

 

“The findings in this study revealed that the existence of short selling could improve financial performance. Therefore, H1 is accepted consistent with the outcomes of Massa et al. (2015). For H2, the results showed that CSR performance has a complete mediating effect on the relationship between short-selling deregulation and financial performance of listed SMEs in China. Therefore, H2 is accepted. In terms of contribution, this study acknowledged the financial policymakers or corporate executives to expand the idea and understanding of short-selling and CSR performance and the fact that short-selling could affect corporate behaviours and eventually improve firm financial performance.

 

Additionally, few studies have highlighted the link between short-selling and corporate sustainability in China. Consequently, this study addresses this gap by analysing how short-selling affects CSR performance for stakeholders and how CSR performance eventually improves the financial performance of SMEs in China. Compared to previous studies, this study is novel since it applies the mediating effect of CSR performance and explains the channel about how short selling can improve firm performance by adopting CSR practices, which provides a fundamental insight on the link between capital market tools and corporate financial performance. The result also shows that CSR performance in family businesses was more pronounced compared to non-family businesses. Similarly, CSR performance has a more prominent mediating effect on the relationship between the variables for firms experiencing a high degree of short-selling attacks. Besides, CSR performance was examined to prove that corporate executives should be concerned about CSR indicators for firm development. Finally, this study explored short-selling and CSR based on a developing country's perspective, unlike most studies that focused on developed countries. Further studies can adopt qualitative methodology such as surveys or questionnaires to capture whether short-selling motivates corporate executives to engage in sustainable CSR practices and improve other corporate behaviours. ”

 

Reviewer 2 Report

1. Every scientific article must respect the following structure: “Introduction”, “Literature review”, “Research methodology”, “Results & Discussion”, “Conclusions”, “References”. From this point of view, the article respect just partial the above structure (e.g. I can see section 2 “Institutional Background of Short-selling and the SME Board in China” and section 3 “Theoretical analysis and hypotheses development” which have nothing in common with a classic structure of a scientific article). I suggest the author to rewrite the article according this remark.

2. The author must focus a little bit more on the research methodology, in order to present it very clear. I suggest the author to present, only from theoretical point of view, which are the main steps of the research method (e.g. “Step 1 Identify the main variables for the analysis”, “Step 2 Choosing the proper method / model / tests for analysis”, “Step 3 Collecting data” etc.). For each step, the author must provide a short description in order to justify the inclusion of the phase in the methodology (the phases must be presented in a logical sequence, in order to be easy to understand for the reader).

3. The "Conclusion" section is poor, an improvement is mandatory. This section starts with a short description of the research (from this point of view, it looks like the abstract). In order to increase the practical value of the research, I suggest the author to identify whether there is a connection between the main findings of the paper and some suggestive phenomena / processes within the Chinese economy. Furthermore, the author may present the results of the research study from different perspective (from the government / policy maker point of view, from the entrepreneur perspective, from the community point of view etc.)

4. The author must emphasize the novelty degree of this research paper; what this article brings new to the science, comparing with other previous (already published) articles?

5. “References” section may be improved, adding some other suggestive titles in the field, adding new dimensions to the scientific horizon:

1. • Michna A., Kmeciak R. (2020). Open-Mindedness Culture, Knowledge-Sharing, Financial Performance, and Industry 4.0 in SMEs, Sustainability, vol. 12, issue 21, article number: 9041
   • Khan U., Zhang Y.G., Salik M. (2020). The Financial Performance of Korean Manufacturing SMEs: Influence of Human Resources, JOURNAL OF ASIAN FINANCE ECONOMICS AND BUSINESS, vol. 7, issue 8, pp. 599-611
   • Cicea C., Popa I., Marinescu C., Stefan S. (2019). Determinants of SMEs' performance: evidence from European countries, ECONOMIC RESEARCH-EKONOMSKA ISTRAZIVANJA, vol. 32, issue 1, pp. 1602-1620
   • Ardito L., Galati F., Petruzzelli A.M., Corvino A. (2020). Improving the financial performance of SMEs The presence in foreign markets and the moderating role of corporate group and alliance portfolio size, BUSINESS PROCESS MANAGEMENT JOURNAL, vol. 26, issue 5, pp. 1041-1054

 

Author Response

Point 1: Every scientific article must respect the following structure: “Introduction”, “Literature review”, “Research methodology”, “Results & Discussion”, “Conclusions”, “References”. From this point of view, the article respect just partial the above structure (e.g. I can see section 2 “Institutional Background of Short-selling and the SME Board in China” and section 3 “Theoretical analysis and hypotheses development” which have nothing in common with a classic structure of a scientific article). I suggest the author to rewrite the article according this remark. 


 

Response 1: Thanks for the comment. Amendment done according to the reviewers’ comments and highlighted with yellow on page 3 to 5. As suggested by the examiners, the authors follow the remarks which started with “Introduction”, “the Literature review section, including Short Selling and the SME Board in China, Short Selling and firm value, Short selling, CSR performance and firm financial performance”, “Research methodology”, “Results & Discussion, “Conclusion”.

 

Point 2: The author must focus a little bit more on the research methodology, in order to present it very clear. I suggest the author to present, only from theoretical point of view, which are the main steps of the research method (e.g. “Step 1 Identify the main variables for the analysis”, “Step 2 Choosing the proper method / model / tests for analysis”, “Step 3 Collecting data” etc.). For each step, the author must provide a short description in order to justify the inclusion of the phase in the methodology (the phases must be presented in a logical sequence, in order to be easy to understand for the reader).

 

Response 2: Thanks for the comment. The research methodology section is rearranged according to reviewers comment and highlighted in yellow on page 6 to 10.  We presented the research methodology section in a logical sequence started from “measurement of variables, Empirical Models, The propensity score matching (PSM) method, Data and Sample Resources”.  

 

Point 3: The "Conclusion" section is poor, an improvement is mandatory. This section starts with a short description of the research (from this point of view, it looks like the abstract). In order to increase the practical value of the research, I suggest the author to identify whether there is a connection between the main findings of the paper and some suggestive phenomena / processes within the Chinese economy. Furthermore, the author may present the results of the research study from different perspective (from the government / policy maker point of view, from the entrepreneur perspective, from the community point of view etc.)

Response 3: Thanks for the comments. Amendment done according to the comment and were highlighted with yellow colour on page 15.  The amendment of this section as followed:

 

The findings in this study revealed that the existence of short selling could improve financial performance. Therefore, H1 is accepted consistent with the outcomes of Massa et al. (2015). For H2, the results showed that CSR performance has a complete mediating effect on the relationship between short-selling deregulation and financial performance of listed SMEs in China. Therefore, H2 is accepted. In terms of contribution, this study acknowledged the financial policymakers or corporate executives to expand the idea and understanding of short-selling and CSR performance and the fact that short-selling could affect corporate behaviours and eventually improve firm financial performance.

 

Additionally, few studies have highlighted the link between short-selling and corporate sustainability in China. Consequently, this study addresses this gap by analysing how short-selling affects CSR performance for stakeholders and how CSR performance eventually improves the financial performance of SMEs in China. Compared to previous studies, this study is novel since it applies the mediating effect of CSR performance and explains the channel about how short selling can improve firm performance by adopting CSR practices, which provides a fundamental insight on the link between capital market tools and corporate financial performance. The result also shows that CSR performance in family businesses was more pronounced compared to non-family businesses. Similarly, CSR performance has a more prominent mediating effect on the relationship between the variables for firms experiencing a high degree of short-selling attacks. Besides, CSR performance was examined to prove that corporate executives should be concerned about CSR indicators for firm development. Finally, this study explored short-selling and CSR based on a developing country's perspective, unlike most studies that focused on developed countries. Further studies can adopt qualitative methodology such as surveys or questionnaires to capture whether short-selling motivates corporate executives to engage in sustainable CSR practices and improve other corporate behaviours.

 

 

Point 4: The author must emphasize the novelty degree of this research paper; what this article brings new to the science, comparing with other previous (already published) articles?

 

Response 4: Thanks for the comments. Amendment done according to the comment and were highlighted with yellow colour in conclusion section on page 15.  The amendment as followed:

 

“this study acknowledged the financial policymakers or corporate executives to expand the idea and understanding of short-selling and CSR performance and the fact that short-selling could affect corporate behaviours such as innovation, tax avoidance, and earning management.

 

Additionally, few studies have highlighted the link between short-selling and corporate sustainability in China. Consequently, this study addressed this gap by analysing how short-selling affects CSR performance for stakeholders and how CSR performance eventually improves the financial performance of SMEs in China. Compared to previous studies, this study is novel since it applied the mediating effect of CSR performance. The result also shows that CSR performance in family businesses was more pronounced compared to non-family businesses. Similarly, CSR performance has a more prominent mediating effect on the relationship between the variables for firms experiencing a high degree of short-selling attacks. Besides, CSR performance was examined to prove that corporate executives should be concerned about CSR indicators for firm development. Finally, this study explored short-selling and CSR based on a developing country's perspective, unlike most studies that focused on developed countries. Further studies can adopt qualitative methodology such as surveys or questionnaires to capture whether short-selling motivates corporate executives to engage in sustainable CSR practices.”

Point 5: “References” section may be improved, adding some other suggestive titles in the field, adding new dimensions to the scientific horizon:

 

Response 5: Thanks for the comment. Amendment was done according to the comment and the added references is highlighted with yellow colour on page 1. The amendment of this part as followed:

 

In addition, apart from the short-selling there are another aspect that have an impact on the performance of SME which are economic aspects of SME activity, social issues (Cicea et al., (2019) and the willingness to implement industry 4.0 in SMEs (Michna & Kmieciak, 2020) in China.

Round 2

Reviewer 1 Report

The conclusion is still not appropriate, in terms of the format and style. I suggest the authors read a few more relevant articles published on top tier finance journals and redo their conclusion.  

Author Response

Please see the attachment.

Author Response File: Author Response.pdf

This manuscript is a resubmission of an earlier submission. The following is a list of the peer review reports and author responses from that submission.