Activist Short-Selling

Activist short-selling refers to the phenomenon whereby short-sellers publicly talk down securities to benefit their short positions. It is very different from traditional short-selling in which short-sellers wait quietly for the decline of stock prices (ie, passive short-selling). 

I examine this topic in my recent paper, which contains the first large-sample study on the determinants and consequences of activist short-selling. Combining information from SeekingAlpha.com and ActivistShorts.com, I collect more than 6,000 activist short-selling cases against listed companies from 2006 to 2015. I find that (1) activist short-selling leads to much larger market reactions than comparable passive short-selling; (2) activist short-sellers are more likely to target firms with severe overvaluation and uncertainty features; (3) targets’ overvaluation (uncertainty) features are increasingly (decreasingly) important in predicting returns from the short-term to the long-term; (4) their overvaluation features predict short-selling allegations that focus on valuation issues such as “bubble,” while their uncertainty features predict allegations that sound severe such as “fraud”; and (5) uncertainty features also predict targets’ likelihood to respond to allegations.

Wuyang Zhao is a PhD Candidate in Accounting at Rotman School of Management, University of Toronto.