Responding to Activist Short Sellers: Allegations, Firm Responses, and Outcomes

Abstract

Activist short sellers identify and publicize allegations of overvaluation, and frequently fraud, to induce long shareholders to sell and thereby to profit from the resulting price decline. We provide descriptive evidence that firms make several distinct types of disclosures in response to activist short seller campaigns and are more likely to respond publicly to reports that present new evidence not already available in public filings. Firms that disclose internal investigations may have more serious issues, including fraud, and these firms are associated with higher rates of SEC enforcement actions and lower rates of being acquired. Our analysis provides important new evidence on the role of activist short selling and the information revealed in target firm responses.