Activist Short-Selling and Corporate Opacity

Abstract

Activist short-sellers could play an information role in capital markets by disclosing informative short-theses, or, as many are concerned, a manipulation role by spreading misinformation. To shed light on this controversy, this paper focuses on a powerful setting where both roles are heightened by studying activist short-sellers’ interest in opaque firms, whose investors tend to have low-precision information and thus give short-theses higher weight in their investing decisions. I find that activist short-sellers tend to target opaque firms while non-activist short-sellers generally tend to avoid such firms. Moreover, opaque targets experience about three times as negative abnormal returns in both the short and long term as non-opaque targets, suggesting that on average activist short-sellers conduct informative shorts. However, such overall dominance of information role does not imply the non-existence of potential manipulation – I find that opaque targets witness more dramatic price reversals, particularly when there is substantial initial drop in targets’ prices immediately after the attacks. Overall, my findings suggest that activist short-sellers generally exploit corporate opacity for informative shorts, but there is evidence of manipulation indicated by price reversals.

Keywords: Activist Short-Selling, Corporate Opacity, Information, Manipulation, Short-Interest, Price Reversals

JEL Classification: G14, M41, M43