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

Naveen Khanna and Richmond D. Mathews

Journal of Financial Economics, 2012, vol. 106, issue 2, 229-246

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.

Keywords: Speculation; Short selling; Regulation; Manipulation; Bear raids (search for similar items in EconPapers)
JEL-codes: G18 G34 (search for similar items in EconPapers)
Date: 2012
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Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:106:y:2012:i:2:p:229-246

DOI: 10.1016/j.jfineco.2012.06.006

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