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Politics : Formerly About Advanced Micro Devices
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From: TimF9/25/2008 8:23:44 PM
   of 1577097
 
Opting out of the short-sale list

The argument against short-sale restrictions is that short-sales help load more information into stock prices. More efficient markets reduce risk and therefore the cost of capital. In other words, they help the firms whose stock is being traded.

That’s supposed to be the rationale for the securities laws – a sort of government subsidy to the stock markets. So it’s ironic that while providing this subsidy the government would actually undercut the market for information.

One would expect firms themselves to see the problem and take themselves out of the short-sale ban. Indeed, a couple of firms have done so. These firms arguably gain from the short-sale ban in the sense that the ban enables them to send a positive signal to the market.

As NYT Dealbook notes:

Why take oneself off the list? “Short-selling is an important activity in terms of providing information to market participants,” Rob Dillon, the chief executive of Diamond Hill, told The Times on Monday. “What is so frequently misunderstood by so many, whether regular investors or C.E.O.’s, is that the goal of marketplace is to have stock price be accurate reflection of fundamentals of your business. They think goal is to have stock price as high as it could be.”

So why aren’t more firms doing this? Could it be because it’s in managers’ personal interest (if not their firms) to keep information out of the market that negatively reflects on their performance? These firms may have a higher cost of capital than the firms that opt out, but not as high as the firms that disclose negative information. Thus, the ban provides cover for bad managers.

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