Activist Short-Selling

Abstract

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