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

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  • Khanna, Naveen
  • Mathews, Richmond D.
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    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.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 106 (2012)
    Issue (Month): 2 ()
    Pages: 229-246

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    Handle: RePEc:eee:jfinec:v:106:y:2012:i:2:p:229-246

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Speculation; Short selling; Regulation; Manipulation; Bear raids;

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    Cited by:
    1. Markus K. Brunnermeier & Martin Oehmke, 2013. "Predatory Short Selling," NBER Working Papers 19514, National Bureau of Economic Research, Inc.
    2. Amelia Pais & Philip A. Stork, 2013. "Short-Selling, Leverage and Systemic Risk," Tinbergen Institute Discussion Papers 13-186/IV/DSF68, Tinbergen Institute.
    3. Alex Edmans, 2013. "Blockholders and Corporate Governance," NBER Working Papers 19573, National Bureau of Economic Research, Inc.

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