Post-apocalyptic : the real consequences of activist short-selling

This paper examines the real effects of a recent phenomenon commonly referred to as “activist short-selling,” where short-sellers publicly talk down stocks to benefit their short positions. First, we show that after firms are targeted by activist short-sellers, their investing, financing, and paying-out activities on average drop by 7.2%, 24.5%, and 7.6%, respectively. Using a battery of empirical tests, we find that our results are unlikely driven by the activists' ability to select declining firms. Second, we provide evidence of three different channels through which activist short-selling leads to real changes in the firm: increased cost of capital, more monitoring, and feedback from stock prices. Third, we find that firms that are more vulnerable to “short and distort” suffer from more drastic declines in real activities. Fourth, our evidence indicates that on average, firms targeted by activist short-sellers experience improvement in real efficiency. This study contributes to the literature on activist investors and on short-selling, and sheds light on the policy debate over regulations on activist short-selling