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Predatory Short Sales and Bailouts

Author

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  • Posch, Peter N.
  • Löffler, Gunter
  • Kranz, Sebastian

Abstract

This paper extends the literature on predatory short selling and bailouts through a joint analysis of the two. We consider a model with informed short sales, as well as predatory short sales by an uninformed investor, which can trigger the inefficient liquidation of a firm. We obtain several novel results: A goverment commitment to bail out insolvent firms with positive probability can increase welfare because it selectively deters predatory short selling without hampering desirable informed short sales. Contrasting a common view, bailouts can be optimal ex ante but undesirable ex post. Furthermore, bailouts in our model are a better policy tool than short selling restrictions. Welfare gains from the bailout policy are unevenly distributed: shareholders gain while taxpayers lose. Bailout taxes allow ex-ante Pareto improvements.

Suggested Citation

  • Posch, Peter N. & Löffler, Gunter & Kranz, Sebastian, 2015. "Predatory Short Sales and Bailouts," VfS Annual Conference 2015 (Muenster): Economic Development - Theory and Policy 114734, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc15:114734
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    References listed on IDEAS

    as
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    JEL classification:

    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • D53 - Microeconomics - - General Equilibrium and Disequilibrium - - - Financial Markets
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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