From 1977-2002, some companies publicly or privately challenged short sellers of their own stock. How did the stocks of these companies perform in the 3 years following those challenges?
Correct answer: 40% worse than the market
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The simple fact that short selling--betting against a company's stock--is occurring may in itself be too commonplace to help predict that stock's direction. But it turns out that the way management responds to short seller activity was a strong negative indicator for that company's stock, at least over the period analyzed in a recent paper by Owen Lamott of the University of Chicago.
Management responses in the period to short selling activity ranged from nothing, which was most common, all the way to the farcical, bizarre, and even allegedly criminal. Over the period 1977-2002, Lamott tallies 326 instances of "belligerent statements," legal actions, and other activities designed by management to either make it harder to short the company's stock, or to discredit those who are trying to short it.
Companies that engaged in these activities tended to see their stock prices suffer considerably afterwards--on average, such companies experienced a 42% underperformance against the market in the 3 years following their challenging instance. One hypothesis that accounts for this behavior is that short sellers are largely correct in their assessment about a company's prospects, at least in cases where management challenges the short sellers vigorously. |
