R2r analytics are the short & distort experts
Short selling and investor activism are on the rise. Being able to detect the early signs of manipulation and document suspicious trading activity is critical for companies to get in front of events and respond proactively.
Activist Short Selling
Activist short selling is a controversial investing strategy that can be used to generate significant profits from share price declines.
The basic idea is to first take a short position in a stock, betting that the price will fall. Once the price starts to drop, the activist short seller will release allegations about the company, often in the form of a research report.
This can cause the stock price to plunge as other investors start to sell the stock. Finally, the activist short seller will close out their position.
In 2021 there were 135 new shorting campaigns. On average, the shares of targeted companies declined an amazing -42.1% following the release of short reports, while in 47 cases the decline was greater than -60%.
Country split of 2021 Activist Shorts
The vast majority of the short calls were targeting US-headquartered public companies.
Most effective short report activists in 2021
Source - Breakoutpoint.com
Source - Breakoutpoint.com
According to 2022 academic research, the long-term impact of short-selling activism on targeted companies is often catastrophic.
*We show that negative activism is associated with significant and declining long-term share returns and operating performance, as well as an increase in securities litigation and regulatory actions against targeted firms.
Key findings:
The initial attack and share price decline are frequently just the beginning of trouble.
The magnitude of the initial share price decline often triples over the following years.
Short selling activism is strongly associated with subsequent securities class action litigation and regulatory intervention.
Executive and board turnover is significantly higher.
Access to capital and future deal terms can be significantly impaired.
Short & Distort
“Short & distort” is an illegal form of stock manipulation whereby a company’s stock is shorted and a negative short report is published that distorts or in some way makes allegations or claims that are untrue.
Prior to publishing, employees or former employees are often approached to elicit information and may be financially incentivized to provide damaging information that leads to regulatory investigations.
After publication, short sellers are incentivized to maintain pressure on the company and often leverage social media to repeat allegations to create an echo chamber of negativity around the company.
It’s important that targeted companies quickly understand the nature and scope of the threat and only work with experienced professionals who have extensive experience with these types of complex cases.