Shorting Down Value: The Toxic Effect of Insufficient Internal Liquidity

57 Pages Posted: 6 Jun 2006  

Austin Murphy

Oakland University - School of Business Administration

Joseph H. Callaghan

Oakland University

Mohinder Parkash

Oakland University

Multiple version iconThere are 2 versions of this paper

Date Written: June 3, 2006

Abstract

Within the context of fundamentally efficient markets, this paper demonstrates analytically how short sellers can put non-transitory downward pressure on the stock market prices and intrinsic values of companies that need to raise external capital because of insufficient internal liquidity. The model presented helps explain anomalous empirical findings in the extant literature on shorting and related issues. Empirical tests are also conducted in this research that provide evidence consistent with the theory. The model's implications yield important normative conclusions that supply justification for the sizable cash reserves held by corporations and their reluctance to raise external capital.

Keywords: Shorting, Liquidity, Distress Valuation

JEL Classification: G12, G33

Suggested Citation

Murphy, Austin and Callaghan, Joseph H. and Parkash, Mohinder, Shorting Down Value: The Toxic Effect of Insufficient Internal Liquidity (June 3, 2006). Available at SSRN: https://ssrn.com/abstract=906425 or http://dx.doi.org/10.2139/ssrn.906425

J. Austin Murphy (Contact Author)

Oakland University - School of Business Administration ( email )

Varner Hall - Room 502
Rochester, MI 48309-4401
United States
248-370-2125 (Phone)
248-370-4275 (Fax)

Joseph H. Callaghan

Oakland University ( email )

Rochester, MI 48309-4401
United States
248-370-3538 (Phone)
248-370-4275 (Fax)

HOME PAGE: http://www.sba.oakland.edu/Faculty/Callaghan/index.html

Mohinder Parkash

Oakland University ( email )

Rochester, MI 48309-4401
United States

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