Short sellers: Villains or scapegoats?

Abstract

This paper discusses the role of short sellers and the concerns which are expressed in the news media about their activities. In particular, it examines the problem of optimism in analysts' forecasts which might initially lead to 'high' share prices and the limitations of both agency and stakeholder theory in providing short sellers with a legitimate role. With the help of the existing empirical literature, we argue that short sellers can be regarded as carrying out a useful information function in financial markets. Indeed, encouraging short sellers to operate more effectively in the market as well as requiring fuller disclosure of their activities could provide a useful antidote to some of the share price rises which have been seen in recent years in failing companies.