Pessimistic Target Prices by Short Sellers

Alexandre Madelaine, Luc Paugam, Hervé Stolowy and Wuyang Zhao
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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]

Working Papers from HAL

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.

Keywords: target price; short-selling attacks; pessimistic bias; price impact; informativeness; reversals; retail investors (search for similar items in EconPapers)
Date: 2021-12-06
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Persistent link: https://EconPapers.repec.org/RePEc:hal:wpaper:hal-03885232

DOI: 10.2139/ssrn.3978136

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