Using Short Selling to Realize Corporate Fraud Exposure Capital Gains

Jesper Sørensen ()

Chapter Chapter 30 in Shorting Fraud, 2025, pp 305-310 from Springer

Abstract: Abstract This chapter explores the mechanics and risks of short selling as a strategy to profit from investing in fraudulent corporations. It explains the basic process of short selling, where investors borrow shares, sell them at a high price, and intend to repurchase shares later at a lower price to return them to the lender. The chapter emphasizes the substantial risks involved in short selling, including the potential for unlimited losses if the share price rises instead of falling. It illustrates these risks with a hypothetical example involving a fraudulent company. Additionally, the chapter discusses specific risks associated with shorting fraudulent companies, such as the possibility of a short squeeze, regulatory interventions, and liquidity problems. It also highlights the costs of short selling, including borrowing fees, dividends payments, transaction costs, etc. Finally, the chapter revisits the Wirecard fraud case to demonstrate the challenges of timing short positions in fraudulent companies and the potential for significant losses if the fraud is not exposed in a timely manner.

Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:spr:sprchp:978-3-031-81834-9_30

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DOI: 10.1007/978-3-031-81834-9_30

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