NEWS

Gary Weiss writes in The Globe and Mail (August 27, 2010, “Short Selling Isn’t That Bad” ), “The problem with the anti-short crusade is that the shorts are rarely the cause of widespread fear and panic. The shorts like to portray themselves as truth tellers who expose excessive valuations, fundamental weaknesses and blatant fraud in companies. Yet regulators often blame the shorts, rather than incompetent or corrupt managers of companies under siege, for market turmoil.”

He writes, “Fortunately, the anti-short tide seems to be turning a little. As the market bottomed and climbed in 2009, the traditional role of shorts as a stabilizing force became more apparent—after all, they eventually have to buy back the shares they borrow and sell. The crisis also reminded investors and regulators that shorts are often the most effective corporate watchdogs.

“A recently published study by researchers at the University of Chicago and the University of Toronto examined 216 corporate fraud cases between 1996 and 2004. Shorts uncovered 14.5% of those frauds, not far behind the 17% that were exposed by whistleblowers within companies. And what about the SEC? It uncovered just 6.6% of the frauds.”

That study, “Who Blows the Whistle on Corporate Fraud?” was written by University of Chicago professors Adair Morse and Luigi Zingales and Rotman School of Management Professor Alexander Dyck.

Another study ( “Short Sellers and Financial Misconduct” ) published by researchers Jonathan M. Karpoff at the University of Washington and Xiaoxia Lou at the University of Delaware found that short sellers:
• Accelerate the average time to discovery of corporate misconduct (from 26 to 18 months).
• Dampen the inflation of a company’s share prices during the period of financial fraud.
• Do not exacerbate the inevitable share price drops when a firm’s fraud is revealed publicly.
• Predict which firms will be caught misrepresenting their finances.