Pessimistic Target Prices by Short Sellers

We study a rising phenomenon whereby activist short sellers, who disclose their short theses to circumvent limits to arbitrage, provide quantitative disclosures in the form of target prices. After establishing that those target prices are informative in predicting future returns, we argue that short sellers’ disclosure of target prices reflects a tradeoff between three factors: the speed of price adjustment, the exacerbation of certain risks, and reputation considerations. We find supporting evidence for all three factors—target price disclosures are positively associated with price adjustment speed, the retaliation and challenges from shareholders and analysts, and proxies of short sellers’ information precision, which contributes to their reputation. We further argue and find evidence that the salience and quantitative nature of target prices contribute to the accelerated price adjustment by reducing investors’ processing costs. Taken together, our study sheds light on the economic tradeoffs arising when investors decide to disclose quantitative information.