We examine whether activist short campaigns generate broader market discipline by reducing fraud risk among firms they do not directly target. Exploiting the staggered arrival of the first major short campaign across twelve countries, we use complementary within- and cross-country designs to compare the responses of non-target firms with differing exposure to activist scrutiny. Following a country’s first major campaign, more-exposed firms experience short-window stock returns that are 2.1 percentage points lower than those of less-exposed peers and wider bid-ask spreads as investors reassess firms’ fraud risk and the potential costs of future activist targeting. Over longer horizons, exposed firms exhibit lower fraud risk: their financial reporting characteristics become less similar to those of firms targeted in campaigns alleging financial misreporting. Consistent with meaningful improvements in firms’ information environments, the post-campaign widening in bid-ask spreads is mitigated for exposed firms that take actions to reduce fraud risk. Overall, our findings indicate that activist short selling can generate effective information-based market discipline that extends beyond the firms activists directly target.
| Speaker: | Dr Mark Maffett Professor, University of Miami |
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