Activist Short-Selling

Abstract

Regulators and investors are concerned that activist short-sellers who publicly talk down stocks manipulate the market by creating panic. Using a large sample of activist short-selling, I find that activist short-sellers tend to target firms with overvaluation features (that predict future underperformance) and uncertainty features (that indicate imprecision of investors’ information). Higher overvaluation predicts lower long-term returns but the predictive power is weaker for short-term returns. By contrast, higher uncertainty predicts lower short-term returns but not lower long-term returns, implying a gradual reversal. Overall, my findings suggest that activist short-selling is informative, but it does create panic among investors.

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

JEL Classification: G14, M41, M43