Is Short Selling Evil?

Is Short Selling Evil?

 

In this episode, Kate and Veljko delve into the contentious topic of short selling. The discussion begins with an explanation of viatical settlements and transitions into an in-depth exploration of short selling—its mechanisms, benefits, and ethical implications. The hosts examine the historical and legal controversies surrounding it and present empirical research highlighting its role in market efficiency and managerial discipline. They also touch on notable anecdotes, including the GameStop saga and the Vatican’s criticism of financial markets, and ultimately aim to dispel common misconceptions about short selling by emphasizing its overall positive impact on financial markets.

 

00:00 Viatical Settlements

09:42 Welcome to Questions in Finance!

10:20 Defining Short Selling

14:29 Put Options Vs. Short Sales

15:53 Risk Exposure

17:07 Negative Information, Prices, and the Case of GameStop

32:11 Wirecard

39:14 The Pope and the Chairman Walk Into a Bar...

48:32 Pricing Efficiency, Bubbles

59:13 Short Sales and Corporate Governance

01:15:42 Empty Voting

01:19:29 Summarizing, Wrapping Up

 

 

Bibliography:

 

Bargeron, Leonce, and Alice Bonaime. "Why do firms disagree with short sellers? Managerial myopia versus private information." Journal of Financial and Quantitative Analysis 55, no. 8 (2020): 2431-2465

 

Battalio, Robert, and Paul Schultz. "Options and the bubble." The Journal of Finance 61, no. 5 (2006): 2071-2102.

 

Beber, Alessandro, and Marco Pagano. "Short‐selling bans around the world: Evidence from the 2007–09 crisis." The Journal of Finance 68, no. 1 (2013): 343-381.

 

Boehmer, Ekkehart, and Juan Wu. "Short selling and the price discovery process." The Review of Financial Studies 26, no. 2 (2013): 287-322.

 

Bris, Arturo, William N. Goetzmann, and Ning Zhu. "Efficiency and the bear: Short sales and markets around the world." The Journal of Finance 62, no. 3 (2007): 1029-1079.

 

Brogaard, Jonathan, Terrence Hendershott, and Ryan Riordan. "High frequency trading and the 2008 short-sale ban." Journal of Financial Economics 124, no. 1 (2017): 22-42.

Brunnermeier, Markus K., and Martin Oehmke. "Predatory short selling." Review of Finance 18, no. 6 (2014): 2153-2195.

 

Chen, Yi-Wen, Sheng-Syan Chen, and Robin K. Chou. "Short-sale constraints and options trading: Evidence from Reg SHO." Journal of Financial and Quantitative Analysis 55, no. 5 (2020): 1555-1579.

 

Curtis, Asher, and Neil L. Fargher. "Does short selling amplify price declines or align stocks with their fundamental values?." Management Science 60, no. 9 (2014): 2324-2340.

 

Fang, Vivian W., Allen H. Huang, and Jonathan M. Karpoff. "Short selling and earnings management: A controlled experiment." The Journal of Finance 71, no. 3 (2016): 1251-1294.

 

Fotak, Veljko, Vikas Raman, and Pradeep K. Yadav. "Fails-to-deliver, short selling, and market quality." Journal of Financial Economics 114, no. 3 (2014): 493-516.

 

Haruvy, Ernan, and Charles N. Noussair. "The effect of short selling on bubbles and crashes in experimental spot asset markets." The Journal of Finance 61, no. 3 (2006): 1119-1157.

 

Hu, Henry TC, and Bernard Black. "The new vote buying: Empty voting and hidden (morphable) ownership." S. Cal. L. Rev. 79 (2005): 811.

 

Massa, Massimo, Bohui Zhang, and Hong Zhang. "The invisible hand of short selling: Does short selling discipline earnings management?." The Review of Financial Studies 28, no. 6 (2015): 1701-1736.

 

Rapach, David E., Matthew C. Ringgenberg, and Guofu Zhou. "Short interest and aggregate stock returns." Journal of Financial Economics 121, no. 1 (2016): 46-65.

 

Scheinkman, Jose A., and Wei Xiong. "Overconfidence and speculative bubbles." Journal of Political Economy 111, no. 6 (2003): 1183-1220.

 

 

Media:

CFTC Letter: https://www.cftc.gov/PressRoom/PressReleases/7761-18

 

Soundtrack:

The soundtrack is based on "Walk on a Funky Street" by MondayHopes. Thanks for the music and keep up the good work! Use is under the Pixabay Content License.