The Long-Term Effects of Short Selling and Negative Activism

We investigate the long-term effects of short selling and “negative activism,” where activists seek to profit from declines in the share prices of targeted firms. We show that negative activism is associated with significant and declining long-term share returns and operating performance, as well as an increase in securities litigation and regulatory actions against targeted firms. We explore the policy implications of this new evidence, including ways that policy makers and market participants might take advantage of the potential benefits of short selling negative activism. Our message is straightforward: resist impulses to curb short selling, and instead embrace attempts to harness the information generated by negative activists.

a. Peter Molk is a Professor of Law at the University of Florida Levin College of Law.

b. Frank Partnoy is the Adrian A. Kragen Professor of Law at UC Berkeley School of Law.
Thanks to Farhaan Anjum, Brandon Dekema, Madison McComas, and Amanda Matyk for exemplary research assistance. Thanks for helpful discussions and suggestions from Jordan Barry, Robert Bartlett, Barbara Bliss, Vincent Buccola, Emiliano Catan, Dhammika Dharmapala, Ofer Eldar. Jill Fisch, Merritt Fox, Herb Greenberg, Scott Hirst, Ann Lipton, Joshua Mitts, Bill Page, Elizabeth Pollman, Adam Pritchard, Jay Ritter, Edward Rock, Roberta Romano, Andrew Schwartz, Steven Davidoff Solomon, Holger Spamann, Andrew Tuch, Donn Vickrey, and David Zaring, and to participants in the Corporate Law Academic Webinar Series and the American Law and Economics Association 2021 conference, as well as seminars at the Universities of Colorado, Kentucky, and Pennsylvania.

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