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 are more likely to target opaque firms than non-opaque firms while non-activist short-sellers the opposite. Moreover, opaque targets experience about three times more negative abnormal returns in both the short and long term than non-opaque targets. Further cross-sectional analyses show that opacity associates with even more negative short- and long-term returns for firms vulnerable to manipulation. Taken together, my findings suggest that activist short-sellers exploit corporate opacity to conduct informative rather than manipulative short attacks.

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

JEL Classification: G14, M41, M43