Saturday, April 24, 2010

Go Down Fighting: Short Sellers vs. Firms

What happens to firms which take anti-shorting actions (legal threats, investigations, lawsuits, and various other actions intended to create a short squeeze)? Nothing good.

Abstract:
I study battles between short sellers and firms. Firms use a variety of methods to impede short selling, including legal threats, investigations, lawsuits, and various technical actions intended to create a short squeeze. These actions create short sale constraints. Consistent with the hypothesis that short sale constraints allow stocks to be overpriced, firms taking anti-shorting actions have in the subsequent year very low abnormal returns of about -2 percent per month.
Full Study.