57 Pages Posted: 6 Jun 2006
Date Written: June 3, 2006
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: 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