The Long-Term Effects of Short Selling and Negative Activism

Abstract

We investigate the long-term effects of short selling and “negative activism,” where activists seek to profit from declines in the share prices of targeted firms. We show that negative activism is associated with significant and declining long-term share returns and operating performance, as well as an increase in securities litigation and regulatory actions against targeted firms. We explore the policy implications of this new evidence, including ways that policy makers and market participants might take advantage of the potential benefits of short selling negative activism. Our message is straightforward: resist impulses to curb short selling, and instead embrace attempts to harness the information generated by negative activists.

Keywords: activism, hedge funds, short selling, corporate finance, corporate governance

JEL Classification: k22, g30