The ECGI Spotlight Series
The ECGI Spotlight Series is a global online seminar programme highlighting chosen papers from the ECGI Working Paper Series. The Spotlight Team works together to identify papers from the law and finance series' that will have broad appeal to members of the ECGI network. On occasion, papers may be identified that are not published in the working paper series and following presentation, they will be invited to publish in the series.
The ECGI Spotlight Team consists of Mike Burkart, Professor of Finance, London School of Economics and Political Science and Editor of the ECGI Working Paper Finance Series; Amir Licht, Professor of Law, Harry Radzyner Law School, Interdisciplinary Center Herzliya and Editor of the ECGI Working Paper Law Series; Miriam Schwartz-Ziv, Assistant Professor of Finance, Michigan State University; and Tom Vos, Doctoral researcher, Jan Ronse Institute for Company and Financial Law, KU Leuven Faculty of Law.
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Tuesday, 14 July 2020 | 16:00 CEST | 10:00 EDT
Short sellers play an important role in the transmission of negative information into price. Because short selling leads to negative price pressure, short sellers have been cast as villains throughout history. Following the crash of 1929, for example, the U.S. Senate released the names of large short sellers in an attempt to brand them as “unpatriotic.” Perhaps because of this negative sentiment, investors are often reluctant to publicly disclose short positions.
Yet, recent years have seen a new phenomenon: high-profile short-selling campaigns by hedge funds. David Einhorn's short of Allied Capital provides an illustrative example. In May of 2002, Einhorn announced a short position in Allied at an investment conference, arguing the firm engaged in questionable accounting practices. Allied's stock price dropped by over 10% the following day, and by the next month its short interest increased sixfold.
In this paper, we undertake a comprehensive analysis of short-selling campaigns by hedge funds. Consistent with anecdotal evidence, the prevalence of campaigns has increased considerably in recent years. We show that such campaigns are associated with abnormal returns for targets of approximately -7% as well as changes in the behavior of stakeholders (e.g., other short sellers). Campaigns are primarily undertaken by activist hedge funds, particularly those that have more experience or employ hostile tactics.
Presented by Vyacheslav Fos, Associate Professor of Finance and Hillenbrand Family Faculty Fellow, Boston College
Discussed by Stephen Fraidin, Partner at Cadwalader Wickersham & Taft LLP.