Product Market Competition and Predatory Stock Price Manipulation

We develop a model in which feedback effects from equity markets to firms' access to external finance allow uninformed traders to profit by short selling a firm's stock while going long on its competitors. Because this strategy distorts the investment incentives of the firm targeted by short selling to the benefit of its rivals, we label it predatory stock price manipulation. Our model shows that predatory stock price manipulation leads to inefficient market concentration. Our analysis further unveils product market competition as a channel through which buy orders increase manipulation profits, providing new insights into the regulation of short sales