Persistence of Activist Short-Sellers' Performance: The Effect of Past Success.

Abstract

While the prior literature has documented that the aggregate level of short sales is informative, critics have expressed concern that individual activist short sellers (who not only take short positions but also publish campaigns against target firms) manipulate stock prices to profit from their short positions. We find that activist short sellers do not exhibit persistence in predicting targets' returns in various windows, but do show persistence in identifying targets that delist. Moreover, the market identifies and efficiently reacts to this persistent aspect of activists' performance at the time the campaign is announced. We also find that the short side is able to capitalize on this more negative market reaction on the campaign initiation date by building up short positions prior to the public campaign announcement. Overall, our results suggest that the market provides incentives for activists to maintain their reputations and not issue manipulative campaigns.