Doing Battle with Short Sellers: The Conflicted Role of Blockholders in Bear Raids

49 Pages Posted: 16 Jul 2009 Last revised: 18 May 2012

See all articles by Naveen Khanna

Naveen Khanna

Michigan State University

Richmond D. Mathews

University of Maryland - Department of Finance

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

Khanna, Naveen and Mathews, Richmond D., Doing Battle with Short Sellers: The Conflicted Role of Blockholders in Bear Raids (November 9, 2011). Available at SSRN: https://ssrn.com/abstract=1434387 or http://dx.doi.org/10.2139/ssrn.1434387

Naveen Khanna

Michigan State University ( email )

East Lansing, MI 48824-1121
United States
517-353-1853 (Phone)
517-432-1080 (Fax)

Richmond D. Mathews (Contact Author)

University of Maryland - Department of Finance ( email )

Robert H. Smith School of Business
Van Munching Hall
College Park, MD 20742
United States

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