Deploying Narrative Economics to Understand Financial Market Dynamics: An Analysis of Activist Short Sellers’ Rhetoric

Posted: 8 Feb 2021

See all articles by Luc Paugam

Luc Paugam

HEC Paris, Accounting and Management Control Department

Hervé Stolowy

HEC Paris - Accounting and Management Control Department

Yves Gendron

Université Laval

Multiple version iconThere are 2 versions of this paper

Date Written: November 9, 2020

Abstract

We investigate how activist short sellers (AShSs) expose publicly listed firms in an increasingly popular form of “research reports” openly denouncing alleged frauds, flawed business models, accounting irregularities, and wrongdoings. We focus on six AShSs that issued research reports that often led to a strong negative market reaction. Our empirical analysis exploits both qualitative and quantitative methods for a comprehensive dataset of 383 research reports targeting 171 unique firms, and three firsthand interviews with AShSs. Drawing on Aristotle’s rhetoric, we first examine how AShSs use narratives in striving to convince other investors that the target firms are overvalued. Specifically, we search the documents produced by AShSs for stylized narratives related to credibility-based (ethos), emotions-based (pathos), and logic-based (logos) rhetorical strategies. To assess the impact of these strategies, we examine the extent to which the AShSs’ rhetorical strategies resonate in 3,665 press articles. As expected, the press often refers to logos-based arguments. Interestingly, the press also frequently brings up pathos-based and ethos-based statements. Considering the importance of the press in shaping investors’ opinions, our study points to AShSs’ narratives playing a major role in policing financial markets. Theoretically, we show that AShSs, as dissenting market participants, produce narratives that go beyond the language of formal rationality—as they strive to reveal new information and frame it persuasively, in order to destabilize the extent of trustworthiness surrounding target firms.

Keywords: activist short sellers, persuasion, rhetorical strategies, narrative economics, credibility

JEL Classification: G14, G23, G3, M4, P1

Suggested Citation

Paugam, Luc and Stolowy, Hervé and Gendron, Yves, Deploying Narrative Economics to Understand Financial Market Dynamics: An Analysis of Activist Short Sellers’ Rhetoric (November 9, 2020). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3764455

Luc Paugam

HEC Paris, Accounting and Management Control Department ( email )

1 avenue de la libération
Jouy-en-Josas, 78350
France

Hervé Stolowy (Contact Author)

HEC Paris - Accounting and Management Control Department ( email )

Jouy-en-Josas Cedex
France
+33 1 39 67 94 42 (Phone)
+33 1 39 67 70 86 (Fax)

HOME PAGE: http://www.hec.fr/stolowy

Yves Gendron

Université Laval ( email )

Faculte des sciences de l'administration
2325 rue de la Terrasse, Local 2636
Quebec City, Quebec G1V 0A6
Canada
418-656-2131 ext. 2431 (Phone)
418-656-7746 (Fax)

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