Action & reaction: Firms’ responses to short sellers’ reports

Short activism is a growing phenomenon and recent cases like Wirecard and GameStop have turned the spotlight on activist short sellers. These short sellers are often looked upon critically as their reports can negatively impact targeted firms. Moreover, issuing reports is risky and can result in being sued by the firm. Consequently, short sellers are incentivized to provide accurate information. Nonetheless, it cannot be ruled out that some of them may issue misleading or erroneous reports. Despite the growing impact of activist short sellers, there is little known about how firms respond to these reports. TRR 266 researcher Janja Brendel, together with James Ryans, therefore investigated firms’ reactions and their consequences. 

The term activist short seller refers to hedge funds or individuals who aim to profit from a decrease in a company’s stock price. What does that mean exactly? Activist short sellers borrow stocks and sell these, and then buy stock back at a lower price to return to the lender. The difference in price between selling and buying can result in profits if the price for buying stocks back is lower than the price for selling stocks. But this of course only works if the stock price goes down. This is where the term activist comes in: activist short sellers conduct research on companies with potential corporate fraud cases or financial misstatements. By issuing their reports they try to convince other investors that this firm is overvalued, driving down stock prices.


Clearly, activist short sellers can have a major impact on the targeted firms by issuing these reports. But not all issued reports are necessarily entirely correct. In principle, firms can counter the allegations, thereby preventing a further decline in stock value. So how do targeted firms react? And what consequences do their reactions have?

Firms react to 31% of short sellers’ reports

Target firms react quite differently to short sellers’ reports. Overall, our data shows that only 31% of the firms respond the reports in one or more ways, which are: denying the claims, threatening, or launching lawsuit against the activist, providing additional disclosure, and launching an internal investigation. The most frequent type of response (28%) is a public denial of the claims published through a press release or a conference call. 12% of the reactions are firms providing additional information to investors, 6% file or threaten to file lawsuit against the short seller and 4% launch internal investigations conducted by outside counsel. These findings also demonstrate, that while firms do react to 31% of activist short sellers’ reports, the majority in fact does not react at all.

Types of reply

A decline in stock price - the leading decision factor to respond?

Firms are not obliged to react to short sellers’ reports and they often don’t. When do companies decide to reply to a report? Our research shows that a major decline in the stock price – a negative abnormal return – plays a major role in this. If there is little to no change in the stock price, there is no incentive for firms to react as there is no value decrease. A sharp drop in share prices, however, leads to various ways of public reactions, such as issuing a public statement.

Another important factor that influences firms’ decision to respond is to what extent the report contains credible information that has not been previously disclosed. When the report contains solely opinions and does not provide new factual evidence, firms are less likely to react to activists’ reports.

Are firms’ responses connected to adverse outcomes?

Corporate responses vary widely, depending on the content and credibility of the reports. Their responses can, however, result in adverse outcomes – such as delisting, SEC Auditing and Accounting Enforcement Releases (AAERs), restatements of financial statements, change of auditor, or being targeted for acquisition.  We observe a correlation between the type of response and the firm’s outcome. Our data shows that firms that initiate internal investigations in response to the short seller report are significantly more likely to be delisted, receive an AAER, and are less likely to be acquired compared to firms that respond in other ways. Furthermore, filing a complaint is directly associated with delisting from the stock market. Our results further show that not responding at all leads to fewer adverse outcomes and a less negative stock price reaction. This seems to suggest that companies that lay low and do not respond have a better chance of getting out almost intact.



The study aims to further contribute to our understanding of activist short sellers and their role in capital markets by investigating how firms are responding to their reports. It sheds light on this particular group of short sellers and their potential to act as monitors in capital markets and provide market participants with information on companies.


Read the publication "Responding to activist short sellers: Allegations, firm responses, and outcomes" by Janja Brendel and James Ryans published in "Journal of Accounting Research".


To cite this blog: Brendel, J. & Ryans, J. (2021, May 27). Action & Reaction: Firms’ responses to short sellers’ reports, TRR 266 Accounting for Transparency Blog.


More Information

We present descriptive evidence of target firms’ responses to activist short seller reports. Our sample includes 351 activist short seller reports released between 1996 and 2018 on U.S. firms. We find that the number of short seller reports has grown substantially in recent years, from an average of 2.5 reports per year during the period from 1996 to 2009, to 35 reports per year from 2010 to 2018.



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