Doing Battle with Short Sellers: The Conflicted Role of Blockholders in Bear Raids
49 Pages Posted: 16 Jul 2009 Last revised: 18 May 2012
Date Written: November 9, 2011
Abstract
If short sellers can destroy firm value by manipulating prices down, an informed blockholder has a powerful natural incentive to protect the value of his stake by trading against them. However, he also has a potentially conflicting incentive to use his information to generate trading profits. We show that a speculator can exploit this conflict, forcing the blockholder to buy a disproportionately large amount to prevent value destruction. This is costly for the blockholder because the trades must sometimes be executed at unfavorable prices. Given reasonable constraints on short sellers, a sufficiently large blockholder will have the incentive to absorb these losses and prevent a bear raid. However, conditions also exist under which outside intervention may be warranted.
Keywords: speculation, short selling, regulation, manipulation, bear raids
JEL Classification: G14, G18, G28, G34, G38
Suggested Citation: Suggested Citation
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