Predatory Short Sales and Bailouts

Peter Posch, Gunter Löffler and Sebastian Kranz

VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy from Verein für Socialpolitik / German Economic Association

Abstract: This paper extends the literature on predatory short selling and bailouts through a joint analysis of the two. We consider a model with informed short sales, as well as predatory short sales by an uninformed investor, which can trigger the inefficient liquidation of a firm. We obtain several novel results: A goverment commitment to bail out insolvent firms with positive probability can increase welfare because it selectively deters predatory short selling without hampering desirable informed short sales. Contrasting a common view, bailouts can be optimal ex ante but undesirable ex post. Furthermore, bailouts in our model are a better policy tool than short selling restrictions. Welfare gains from the bailout policy are unevenly distributed: shareholders gain while taxpayers lose. Bailout taxes allow ex-ante Pareto improvements.

JEL-codes: D53 G10 G38 (search for similar items in EconPapers)
Date: 2015
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https://www.econstor.eu/bitstream/10419/114734/1/VfS_2015_pid_143.pdf (application/pdf)

Related works:
Journal Article: Predatory Short Sales and Bailouts (2019)
Journal Article: Predatory Short Sales and Bailouts (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc15:114734

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