Shorting Down Value: The Toxic Effect of Insufficient Internal Liquidity

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2010

Posted: 5 Jul 2010

See all articles by Mohinder Parkash

Mohinder Parkash

Oakland University

Joseph H. Callaghan

Oakland University

Austin Murphy

Oakland University - School of Business Administration

Multiple version iconThere are 2 versions of this paper

Date Written: June 1, 2010

Abstract

This paper demonstrates analytically how short sellers can put non-transitory downward pressure on the stock market prices and intrinsic values of companies that need to raise external capital because of insufficient internal liquidity. The model helps explain anomalous empirical findings in the extant literature on negative returns to stocks subjected to heavy shorting activity. The implications of the model also supply normative justification for the sizable cash reserves held by corporations and their reluctance to raise external capital. The equity pricing effects implied by the model are illustrated for a large empirical sample of companies negatively impacted by heavy short sales. Empirical tests are also conducted in this research that provide evidence consistent with the theory.

Keywords: Short sales, liquidity, new issue, equity, bankruptcy

Suggested Citation

Parkash, Mohinder and Callaghan, Joseph H. and Murphy, J. Austin, Shorting Down Value: The Toxic Effect of Insufficient Internal Liquidity (June 1, 2010). Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2010. Available at SSRN: https://ssrn.com/abstract=1632706

Mohinder Parkash (Contact Author)

Oakland University ( email )

Rochester, MI 48309-4401
United States

Joseph H. Callaghan

Oakland University ( email )

Rochester, MI 48309-4401
United States
248-370-3538 (Phone)
248-370-4275 (Fax)

HOME PAGE: http://www.sba.oakland.edu/Faculty/Callaghan/index.html

J. Austin Murphy

Oakland University - School of Business Administration ( email )

Varner Hall - Room 502
Rochester, MI 48309-4401
United States
248-370-2125 (Phone)
248-370-4275 (Fax)

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
736
PlumX Metrics