Under the Hood of Activist Fraud Campaigns: Private Information Quality, Disclosure Incentives, and Stock Lending Dynamics

50 Pages Posted: 25 Mar 2024 Last revised: 1 Jun 2024

See all articles by Byung Hyun Ahn

Byung Hyun Ahn

University of California, Berkeley - Haas School of Business

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School

Panos N. Patatoukas

University of California, Berkeley - Haas School of Business

Date Written: February 5, 2024

Abstract

While activist short sellers can play a crucial role in fraud detection, they have come under scrutiny following accusations of systematically disseminating false negative information. We develop a framework delineating the roles of campaign-specific private information quality and short-selling dynamics in shaping disclosure incentives. We predict that the act of disclosure combined with pre-disclosure stock lending dynamics is informative about the quality of an activist’s private information. We find that increased pre-disclosure shorting intensity is associated with more negative post-disclosure returns, adverse media coverage, and consequential campaign outcomes, including auditor turnover, accounting restatements, class-action lawsuits, and performance-related delistings. Furthermore, elevated short-selling costs and risks magnify the association between pre-disclosure shorting intensity and post-disclosure underperformance. Finally, we examine V-shaped reversals and short covering following activists’ disclosures and find no evidence of systematic manipulation. We conclude that activists disclosing fraud allegations under their own names are discouraged from engaging in ‘short-and-distort’ schemes.

Keywords: G12, G14, G23, M41, Activist Short Sellers, Fraud Detection, Disclosure, Stock Lending Market

JEL Classification: G12, G14, G23, M41

Suggested Citation

Ahn, Byung Hyun and Bushman, Robert M. and Patatoukas, Panos N., Under the Hood of Activist Fraud Campaigns: Private Information Quality, Disclosure Incentives, and Stock Lending Dynamics (February 5, 2024). Available at SSRN: https://ssrn.com/abstract=4717157 or http://dx.doi.org/10.2139/ssrn.4717157

Byung Hyun Ahn

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Robert M. Bushman

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-9809 (Phone)

HOME PAGE: http://public.kenan-flagler.unc.edu/faculty/bushmanr/

Panos N. Patatoukas (Contact Author)

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

HOME PAGE: http://https://sites.google.com/berkeley.edu/panos

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