IDEAS home Printed from https://ideas.repec.org/a/eee/jfinec/v106y2012i2p229-246.html
   My bibliography  Save this article

Doing battle with short sellers: The conflicted role of blockholders in bear raids

Author

Listed:
  • Khanna, Naveen
  • Mathews, Richmond D.

Abstract

If short sellers can destroy firm value by manipulating prices down, an informed blockholder has a powerful natural incentive to protect the value of his stake by trading against them. However, he also has a potentially conflicting incentive to use his information to generate trading profits. We show that a speculator can exploit this conflict and force the blockholder to buy a disproportionately large amount to prevent value destruction. This is costly for the blockholder because the trades must sometimes be executed at inflated prices. Given reasonable constraints on short sellers, a sufficiently large blockholder will have the incentive to absorb these losses and prevent a bear raid. However, conditions exist under which outside intervention may be warranted.

Suggested Citation

  • Khanna, Naveen & Mathews, Richmond D., 2012. "Doing battle with short sellers: The conflicted role of blockholders in bear raids," Journal of Financial Economics, Elsevier, vol. 106(2), pages 229-246.
    • Handle: RePEc:eee:jfinec:v:106:y:2012:i:2:p:229-246
    DOI: 10.1016/j.jfineco.2012.06.006
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0304405X12001328
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jfineco.2012.06.006?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Chakraborty, Archishman & Yilmaz, Bilge, 2004. "Informed manipulation," Journal of Economic Theory, Elsevier, vol. 114(1), pages 132-152, January.
    2. Alex Edmans, 2009. "Blockholder Trading, Market Efficiency, and Managerial Myopia," Journal of Finance, American Finance Association, vol. 64(6), pages 2481-2513, December.
    3. Robert A. Jarrow, 2008. "Market Manipulation, Bubbles, Corners, and Short Squeezes," World Scientific Book Chapters, in: Financial Derivatives Pricing Selected Works of Robert Jarrow, chapter 6, pages 105-130, World Scientific Publishing Co. Pte. Ltd..
    4. Antoine Faure-Grimaud, 2004. "Public Trading and Private Incentives," The Review of Financial Studies, Society for Financial Studies, vol. 17(4), pages 985-1014.
    5. repec:bla:jfinan:v:59:y:2004:i:1:p:65-105 is not listed on IDEAS
    6. Jeroen M. Swinkels, 1999. "Education Signalling with Preemptive Offers," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 66(4), pages 949-970.
    7. Allen, Franklin & Gale, Douglas, 1992. "Stock-Price Manipulation," The Review of Financial Studies, Society for Financial Studies, vol. 5(3), pages 503-529.
    8. Qi Chen & Itay Goldstein & Wei Jiang, 2007. "Price Informativeness and Investment Sensitivity to Stock Price," The Review of Financial Studies, Society for Financial Studies, vol. 20(3), pages 619-650.
    9. Anat R. Admati & Paul Pfleiderer, 2009. "The "Wall Street Walk" and Shareholder Activism: Exit as a Form of Voice," The Review of Financial Studies, Society for Financial Studies, vol. 22(7), pages 2445-2485, July.
    10. Itay Goldstein & Alexander Guembel, 2008. "Manipulation and the Allocational Role of Prices," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 75(1), pages 133-164.
    11. repec:bla:jfinan:v:53:y:1998:i:1:p:99-129 is not listed on IDEAS
    12. Dow, James & Gorton, Gary, 1997. "Stock Market Efficiency and Economic Efficiency: Is There a Connection?," Journal of Finance, American Finance Association, vol. 52(3), pages 1087-1129, July.
    13. Geczy, Christopher C. & Musto, David K. & Reed, Adam V., 2002. "Stocks are special too: an analysis of the equity lending market," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 241-269.
    14. Mark Bagnoli & Barton L. Lipman, 1996. "Stock Price Manipulation Through Takeover Bids," RAND Journal of Economics, The RAND Corporation, vol. 27(1), pages 124-147, Spring.
    15. repec:bla:jfinan:v:53:y:1998:i:1:p:1-25 is not listed on IDEAS
    16. Jones, Charles M. & Lamont, Owen A., 2002. "Short-sale constraints and stock returns," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 207-239.
    17. Emre Ozdenoren & Kathy Yuan, 2008. "Feedback Effects and Asset Prices," Journal of Finance, American Finance Association, vol. 63(4), pages 1939-1975, August.
    18. Alex Edmans & Gustavo Manso, 2011. "Governance Through Trading and Intervention: A Theory of Multiple Blockholders," The Review of Financial Studies, Society for Financial Studies, vol. 24(7), pages 2395-2428.
    19. Mike Burkart & Denis Gromb & Fausto Panunzi, 1997. "Large Shareholders, Monitoring, and the Value of the Firm," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(3), pages 693-728.
    20. Leland, Hayne E, 1992. "Insider Trading: Should It Be Prohibited?," Journal of Political Economy, University of Chicago Press, vol. 100(4), pages 859-887, August.
    21. Clifford G. Holderness, 2009. "The Myth of Diffuse Ownership in the United States," The Review of Financial Studies, Society for Financial Studies, vol. 22(4), pages 1377-1408, April.
    22. Yuanzhi Luo, 2005. "Do Insiders Learn from Outsiders? Evidence from Mergers and Acquisitions," Journal of Finance, American Finance Association, vol. 60(4), pages 1951-1982, August.
    23. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-1335, November.
    24. Alex Edmans & Itay Goldstein & Wei Jiang, 2012. "The Real Effects of Financial Markets: The Impact of Prices on Takeovers," Journal of Finance, American Finance Association, vol. 67(3), pages 933-971, June.
    25. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
    26. Sushil Bikhchandani, 1992. "A Bargaining Model with Incomplete Information," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 59(1), pages 187-203.
    27. Tor-Erik Bakke & Toni M. Whited, 2010. "Which Firms Follow the Market? An Analysis of Corporate Investment Decisions," The Review of Financial Studies, Society for Financial Studies, vol. 23(5), pages 1941-1980.
    28. Attari, Mukarram & Banerjee, Suman & Noe, Thomas H., 2006. "Crushed by a rational stampede: Strategic share dumping and shareholder insurrections," Journal of Financial Economics, Elsevier, vol. 79(1), pages 181-222, January.
    29. Shleifer, Andrei & Vishny, Robert W, 1986. "Large Shareholders and Corporate Control," Journal of Political Economy, University of Chicago Press, vol. 94(3), pages 461-488, June.
    30. Edmans, Alex, 2011. "Short-term termination without deterring long-term investment: A theory of debt and buyouts," Journal of Financial Economics, Elsevier, vol. 102(1), pages 81-101, October.
    31. Gul, Faruk & Sonnenschein, Hugo, 1988. "On Delay in Bargaining with One-Sided Uncertainty," Econometrica, Econometric Society, vol. 56(3), pages 601-611, May.
    32. Vila, Jean-Luc, 1989. "Simple games of market manipulation," Economics Letters, Elsevier, vol. 29(1), pages 21-26.
    33. Steven N. Kaplan & Tobias J. Moskowitz & Berk A. Sensoy, 2013. "The Effects of Stock Lending on Security Prices: An Experiment," Journal of Finance, American Finance Association, vol. 68(5), pages 1891-1936, October.
    34. Khanna, Naveen & Slezak, Steve L & Bradley, Michael, 1994. "Insider Trading, Outside Search, and Resource Allocation: Why Firms and Society May Disagree on Insider Trading Restrictions," The Review of Financial Studies, Society for Financial Studies, vol. 7(3), pages 575-608.
    35. Miller, Edward M, 1977. "Risk, Uncertainty, and Divergence of Opinion," Journal of Finance, American Finance Association, vol. 32(4), pages 1151-1168, September.
    36. Duffie, Darrell & Garleanu, Nicolae & Pedersen, Lasse Heje, 2002. "Securities lending, shorting, and pricing," Journal of Financial Economics, Elsevier, vol. 66(2-3), pages 307-339.
    37. Avanidhar Subrahmanyam & Sheridan Titman, 2001. "Feedback from Stock Prices to Cash Flows," Journal of Finance, American Finance Association, vol. 56(6), pages 2389-2413, December.
    38. repec:bla:jfinan:v:53:y:1998:i:1:p:65-98 is not listed on IDEAS
    39. Philip Bond & Alex Edmans & Itay Goldstein, 2012. "The Real Effects of Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 339-360, October.
    40. Khanna, Naveen & Sonti, Ramana, 2004. "Value creating stock manipulation: feedback effect of stock prices on firm value," Journal of Financial Markets, Elsevier, vol. 7(3), pages 237-270, June.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Markus K. Brunnermeier & Martin Oehmke, 2014. "Predatory Short Selling," Review of Finance, European Finance Association, vol. 18(6), pages 2153-2195.
    2. Peng, Juan & Huang, Wenli & Gao, Han & Wang, Hongli, 2022. "Modeling the unintended consequences of short selling for innovation investment," The North American Journal of Economics and Finance, Elsevier, vol. 62(C).
    3. Amelia Pais & Philip A. Stork, 2013. "Short-Selling, Leverage and Systemic Risk," Tinbergen Institute Discussion Papers 13-186/IV/DSF68, Tinbergen Institute.
    4. Fos, Vyacheslav & Appel, Ian & Bulka, Jordan, 2019. "Active Short Selling by Hedge Funds," CEPR Discussion Papers 13788, C.E.P.R. Discussion Papers.
    5. Corum, Adrian Aycan, 2021. "Fighting Fire with Fire: Optimality of Value Destruction to Mitigate Short-Termism," OSF Preprints xhwmg, Center for Open Science.
    6. Luo, Jinbo & Ni, Xiaoran & Tian, Gary Gang, 2020. "Short selling and corporate tax avoidance: Insights from a financial constraint view," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    7. Ni, Xiaoran & Yin, Sirui, 2020. "The unintended real effects of short selling in an emerging market," Journal of Corporate Finance, Elsevier, vol. 64(C).
    8. Ni, Xiaoran & Xu, Hongmei, 2023. "Are short selling threats beneficial to creditors? Insights from corporate default risk," Pacific-Basin Finance Journal, Elsevier, vol. 81(C).
    9. Xia Chen & Qiang Cheng & Ting Luo & Heng Yue, 2020. "Short Sellers and Long‐Run Management Forecasts," Contemporary Accounting Research, John Wiley & Sons, vol. 37(2), pages 802-828, June.
    10. Itay Goldstein, 2023. "Information in Financial Markets and Its Real Effects," Review of Finance, European Finance Association, vol. 27(1), pages 1-32.
    11. Cetemen, D. & Cisternas, G. & Kolb, A. & Viswanathan, S., 2022. "Activist Manipulation Dynamics," Working Papers 22/04, Department of Economics, City University London.
    12. Alex Edmans, 2014. "Blockholders and Corporate Governance," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 23-50, December.
    13. Doruk Cetemen & Gonzalo Cisternas & Aaron Kolb & S Viswanathan, 2022. "Leader-Follower Dynamics in Shareholder Activism," Staff Reports 1030, Federal Reserve Bank of New York.
    14. Hui Ding & Xiaoran Ni & Hongmei Xu, 2021. "Short selling and labor investment efficiency: evidence from the Chinese stock market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(S1), pages 2451-2476, April.
    15. Shuo Wang & Liyi Zheng, 2023. "Whose opinion matters when insiders disagree with short sellers?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(9-10), pages 1527-1571, October.
    16. Toni Ahnert & Caio Machado & Ana Elisa Pereira, 2020. "Trading for Bailouts," Staff Working Papers 20-23, Bank of Canada.
    17. Edmans, Alex & Holderness, Clifford, 2016. "Blockholders: A Survey of Theory and Evidence," CEPR Discussion Papers 11442, C.E.P.R. Discussion Papers.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Richmond Mathews & Naveen Khanna, 2010. "Bear Raids and Short Sale Bans: Is Government Intervention Justifiable?," 2010 Meeting Papers 165, Society for Economic Dynamics.
    2. Itay Goldstein, 2023. "Information in Financial Markets and Its Real Effects," Review of Finance, European Finance Association, vol. 27(1), pages 1-32.
    3. Edmans, Alex & Holderness, Clifford, 2016. "Blockholders: A Survey of Theory and Evidence," CEPR Discussion Papers 11442, C.E.P.R. Discussion Papers.
    4. Brav, Alon & Mathews, Richmond D., 2011. "Empty voting and the efficiency of corporate governance," Journal of Financial Economics, Elsevier, vol. 99(2), pages 289-307, February.
    5. Brogaard, Jonathan & Li, Dan & Xia, Ying, 2017. "Stock liquidity and default risk," Journal of Financial Economics, Elsevier, vol. 124(3), pages 486-502.
    6. Philip Bond & Alex Edmans & Itay Goldstein, 2012. "The Real Effects of Financial Markets," Annual Review of Financial Economics, Annual Reviews, vol. 4(1), pages 339-360, October.
    7. Alex Edmans & Gustavo Manso, 2011. "Governance Through Trading and Intervention: A Theory of Multiple Blockholders," The Review of Financial Studies, Society for Financial Studies, vol. 24(7), pages 2395-2428.
    8. Melissa Porras Prado & Pedro A. C. Saffi & Jason Sturgess, 2016. "Ownership Structure, Limits to Arbitrage, and Stock Returns: Evidence from Equity Lending Markets," The Review of Financial Studies, Society for Financial Studies, vol. 29(12), pages 3211-3244.
    9. Vladimirov, Vladimir & Terovitis, Spyros, 2020. "How Financial Markets Create Superstars," CEPR Discussion Papers 15546, C.E.P.R. Discussion Papers.
    10. repec:oup:revfin:v:29:y:2016:i:12:p:3211-3244. is not listed on IDEAS
    11. Markus K. Brunnermeier & Martin Oehmke, 2014. "Predatory Short Selling," Review of Finance, European Finance Association, vol. 18(6), pages 2153-2195.
    12. Toni Ahnert & Caio Machado & Ana Elisa Pereira, 2020. "Trading for Bailouts," Staff Working Papers 20-23, Bank of Canada.
    13. Alex Edmans, 2014. "Blockholders and Corporate Governance," Annual Review of Financial Economics, Annual Reviews, vol. 6(1), pages 23-50, December.
    14. Bai, Jennie & Philippon, Thomas & Savov, Alexi, 2016. "Have financial markets become more informative?," Journal of Financial Economics, Elsevier, vol. 122(3), pages 625-654.
    15. Benhabib, Jess & Liu, Xuewen & Wang, Pengfei, 2016. "Sentiments, financial markets, and macroeconomic fluctuations," Journal of Financial Economics, Elsevier, vol. 120(2), pages 420-443.
    16. Cheung, William Ming Yan & Im, Hyun Joong & Selvam, Srinivasan, 2023. "Stock liquidity and investment efficiency: Evidence from the split-share structure reform in China," Emerging Markets Review, Elsevier, vol. 56(C).
    17. Jank, Stephan & Roling, Christoph & Smajlbegovic, Esad, 2021. "Flying under the radar: The effects of short-sale disclosure rules on investor behavior and stock prices," Journal of Financial Economics, Elsevier, vol. 139(1), pages 209-233.
    18. Heidi Quah & Janto Haman & Dharmendra Naidu, 2021. "The effect of stock liquidity on investment efficiency under financing constraints and asymmetric information: Evidence from the United States," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(S1), pages 2109-2150, April.
    19. Goldstein, Itay & Ozdenoren, Emre & Yuan, Kathy, 2013. "Trading frenzies and their impact on real investment," Journal of Financial Economics, Elsevier, vol. 109(2), pages 566-582.
    20. Kathy Yuan & Emre Ozdenoren & Itay Goldstein, 2008. "Learning and Complementarities: Implications for Speculative Attacks," 2008 Meeting Papers 276, Society for Economic Dynamics.
    21. Yangyang Chen & Rui Ge & Henock Louis & Leon Zolotoy, 2019. "Stock liquidity and corporate tax avoidance," Review of Accounting Studies, Springer, vol. 24(1), pages 309-340, March.

    More about this item

    Keywords

    Speculation; Short selling; Regulation; Manipulation; Bear raids;
    All these keywords.

    JEL classification:

    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jfinec:v:106:y:2012:i:2:p:229-246. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/505576 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.