Abstract: Over-investment and repeated construction are the stubborn diseases in economic growth since China′s reform and opening to the outside world. To find out more external governance tools and ways for over-investment, this paper uses A shares listed company dataset from 2007 to 2016 in China to examine the interactive relationship between short-selling and over-investment through Mixed Regression Model and Logit Regression Model. The research shows that when investment opportunity declines, if the corporation is still expanding its investment scale, the investors in financial markets will take advantage of the “bad news” and short sell the stock, and securities lending short selling also reduces the probability of a company′s serious over-investment to a certain extent. After controlling for possible endogenous problem with Difference-in-Difference approaches, Propensity Score Matching and the residual of short-selling flow, the above result shows robust. Moreover, the paper finds short selling can reduce over-investment through channels such as “Self-discipline effect”, “Hawthorne effect” and “improving accounting information quality”. However, “Feedback effect” and margin trading have no significant effect on over-investment. Therefore, short selling can constrain over-investment and improve corporate value, perfecting company management.

Key words: short selling, over-investment, potential mechanism, governance effect