This paper examines the impacts of the pilot program of margin trading and short selling on corporate governance using the data of listed firms in China. The results show that the firms significantly increase executive pay for performance sensitivity and CEO turnover for performance sensitivity after their stocks become pilot stocks. These results suggest that margin trading and short selling can serve as external governance devices. We further confirm that becoming pilot stocks improves corporate governance through reducing information asymmetry. We also find that the positive impacts of margin trading and short selling on corporate governance are stronger for firms that are in less competitive product markets and have larger financial distress. In addition, we investigate the impacts of margin trading and short selling separately and find that both margin trading mechanism and short selling mechanism improve corporate governance. These results imply that margin trading and short selling can enhance monitoring stemming from capital market, facilitate information transparency, and thus improve corporate governance.