The Impact of a Short-Selling-Friendly Environment on Board Composition

Abstract

This study examines how short selling influences board composition following a tradition in the strategy literature emphasizing the role of the external environment on firms’ strategies. We predict that a short-selling-friendly environment has a negative effect on the number of outside directors, which is supported by our firm and year fixed effect difference-in-differences analysis. We find that the negative effect of a short-selling-friendly environment becomes stronger when outside directors have a larger network and are busy. Furthermore, we investigate the moderating effect of chief executive officer (CEO) influence on the board and find that the negative effect is more pronounced when the CEO serves as the board chair and when the nominating committee is more nonindependent. Our research identifies a novel determinant of board composition and addresses the endogeneity issue in board composition literature. Funding: This work was supported by the Sogang University Research Grant of 202210048.01. Supplemental Material: The online appendix is available at https://doi.org/10.1287/orsc.2022.16506 .