Short sellers have been cast as villains throughout history. Perhaps because of this sentiment, investors are often reluctant to disclose short positions. Yet, recent years have seen a new phenomenon: high-profile short selling campaigns by hedge funds. In this paper, we undertake a comprehensive analysis of public short selling campaigns by hedge funds. We refer to these campaigns as “active” short selling because hedge funds take costly actions (e.g., public disclosure) to enhance the flow of negative information into prices.
We manually construct a database of active short selling campaigns by hedge funds from media reports. We identify 252 campaigns from 1996 to 2015. Prior to 2008, the average number of campaigns was fewer than 10 per year. However, the number of campaigns has tripled since 2008, peaking with 45 in 2015. Campaigns feature a wide array of allegations; the most common are general overvaluation, problems with the industry/competitors, defective product/business model, and fraud.
Our analysis aims to shed light on the economic factors that influence the decisions of hedge funds to engage in active short selling. We first analyze the benefits associated with campaigns. Targets experience long-term abnormal returns of approximately -7% following the announcement of a campaign. The magnitude of this effect is significantly larger than abnormal returns associated with large changes in short interest. In addition, active short selling is associated with various changes in the behavior of other stakeholders, potentially to the benefit of funds initiating campaigns. Specifically, campaigns are associated with an increase in aggregate short interest, a higher likelihood of litigation against targets, and an increase in media coverage, particularly for articles with a negative tone.
Activists undertake the vast majority (82%) of campaigns in our sample. We find evidence of two mechanisms that potentially explain this difference in behavior between activist and non-activist hedge funds. First, activists likely face lower costs of public engagement because they already have reputations as confrontational investors. Second, because the investment strategy of activists focuses on identifying firms’ problems, they are more likely to uncover information that is conducive to active short selling campaigns. These findings highlight the role of access to activism technology for active short selling.