Activist Short-Selling

This is the first large-sample study on the determinants and consequences of activist short-selling – a unique form of short-selling in which short-sellers publicly “talk down” stocks to benefit their short positions. 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.