November 19, 2021

Short Reports: Time Doesn’t Heal All Wounds

Out of all the types of drama and “client emergencies” that can arise in a securities & corporate governance practice, the release of a short report about your client is one of the most alarming. It can set off a chain reaction in the market and behind closed doors, with everyone wanting quick but thorough answers to legions of questions.

One of the first things the executives and board want to know is, “When is this ordeal going to be behind us?” Unfortunately, the answer for a lot of companies is that it can take a long time – and for some, a full recovery may never arrive. This “ESG Investor” article discusses recent research from a German asset manager about the impact of short seller campaigns. Here’s an excerpt:

The research shows that the gross excess returns of all target companies dropped by about 10% one month after the publication of a negative report. However, small companies’ (those with market capitalisation of less than EUR 5 billion), share prices did not recover within two years of a short campaign, while their larger counterparts staged a comeback.

However, it is worth mentioning that large companies are far from immune from the short selling campaigns. Only those with the shortest memories could forget the Wirecard collapse was a direct result of Viceroy Research’s investigation into widespread fraud at the German payment service provider.

Cyclical companies were also found to be more vulnerable to short seller activism. While targets from defensive sectors recovered after just one month, the downturn in cyclical stocks continued for up to 18 months after publication of the respective reports. The most frequently affected sectors were technology (27% of cases), consumer discretionary (17%) and financials (12%).

The report’s author says that cyclical sectors were targeted in 75% of the cases he looked at. He suggests that because those companies are under more pressure to meet expectations at a particular time, they’re more vulnerable to accusations of fraud. He also predicts that short seller targeting could come to the “E&S” space over time, as claims on those topics become more linked to stock price and regulatory compliance.

Liz Dunshee