Activist Short-Selling

64 Pages Posted: 19 Oct 2016 Last revised: 12 Jun 2017

Wuyang Zhao

University of Toronto, Rotman School of Management, Accounting

Date Written: June 8, 2017


Activist short-selling – a unique form of short-selling in which short-sellers publicly “talk down” stocks to benefit their short positions – attracts intense attention from the public, media, regulators, and other market participants. I combine information from Seeking Alpha and Activist Shorts Research and conduct the first large-sample study on this highly controversial phenomenon, highlighting the vital roles of ex-ante available firm characteristics. I find that (1) activist short-selling leads to much larger market reactions than comparable passive short-selling, (2) activist short-sellers are more likely to target firms with severe overvaluation and uncertainty features, (3) targets’ overvaluation (uncertainty) features are increasingly (decreasingly) important in predicting returns from the short term to the long term, (4) their overvaluation features predict short-selling allegations that focus on valuation issues such as “bubble,” while their uncertainty features predict allegations that sound severe such as “fraud,” and (5) uncertainty features also predict targets’ likelihood to respond to allegations. This paper also has trading implications for short-sellers and other investors, and regulatory implications on how to separate legitimate vs. manipulative short-selling.

Keywords: Activist Short-Selling, Overvaluation, Uncertainty, Determinants, Market Reactions

JEL Classification: G14, M40

Suggested Citation

Zhao, Wuyang, Activist Short-Selling (June 8, 2017). Rotman School of Management Working Paper. Available at SSRN: or

Wuyang Zhao (Contact Author)

University of Toronto, Rotman School of Management, Accounting ( email )

Toronto, Ontario

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