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Pessimistic Target Prices by Short Sellers

Author

Listed:
  • Alexandre Madelaine

    (HEC Paris - Ecole des Hautes Etudes Commerciales)

  • Luc Paugam

    (HEC Paris - Ecole des Hautes Etudes Commerciales)

  • Hervé Stolowy

    (HEC Paris - Ecole des Hautes Etudes Commerciales)

  • Wuyang Zhao

    (University of Texas at Austin [Austin])

Abstract

The proportion of short-selling attacks including target prices has more than doubled from 2010 to 2018. In 637 attacks with target prices, short sellers claim that the attacked firms' stock prices should drop by 65% on average, but the mean (median) decline is only 7% (16%) one year after the attacks, implying severe pessimistic bias. Nevertheless, we show that these target prices are informative about the severity of overvaluation. They are associated with ex ante overvaluation characteristics, the severity of allegations, non-price reactions by the attacked firms and shareholders, and most importantly, the future returns in various windows, even after controlling for various factors including key qualitative characteristics of the attacks. Further, the disclosure of target prices accelerates price discovery after attacks. Finally, we present evidence that some investors, and in particular retail investors, are worse off because they seem to overlook the informativeness of short sellers' target prices.

Suggested Citation

  • Alexandre Madelaine & Luc Paugam & Hervé Stolowy & Wuyang Zhao, 2021. "Pessimistic Target Prices by Short Sellers," Working Papers hal-03885232, HAL.
    • Handle: RePEc:hal:wpaper:hal-03885232
    DOI: 10.2139/ssrn.3978136
    as

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