Corporate Responses under External Scrutiny: The Battle against Short-Seller Research

Abstract

Using the recent emergence of short-seller research as instances of external scrutiny, the study investigates how firms under intense external scrutiny manage to restore market confidence by analyzing their corporate responses. The results indicate that firms under attack by short-sellers generally find it difficult to convince the market only through voluntary disclosures, which may resemble a babbling equilibrium in some cases. To remedy this potential “cheap-talk” situation, actively engaging in two-way conversations with analysts and investors (e.g. by hosting conference calls and corporate visits) appears to help enhance corporate communication to outsiders. Strong endorsement by sell-side analysts may also help restore market confidence. Further, targeted firms may use payout policies such as dividends and continuous share repurchases to signal their values over time.