When Companies Complain About the Shorts, It Isn’t Time to Buy

Short Selling: Misunderstood and Manipulative

Short sellers are often painted as villains in the financial world, largely because their actions—profiting from the decline of companies—can seem counterintuitive to those rooting for corporate success. This perception is further fueled by CEOs who use short sellers as scapegoats for poor performance, sometimes leveraging this rhetoric to shift blame or even for sport. While legal short-selling involves borrowing shares to sell and buying them back at a lower price, the illegal practice of naked short-selling—selling shares without borrowing them—has been a subject of regulatory crackdowns, notably by the SEC in 2008. Despite this, accusations of naked short-selling persist, largely as a tool for deflection and mudslinging.

A Case Study: Devin Nunes and Trump Media & Technology Group

Devin Nunes, CEO of Trump Media and Technology Group, exemplified this trend in a letter to Nasdaq in April 2023, urging an investigation into alleged naked short-selling by firms like Citadel Securities. These accusations, met with skepticism by industry experts who dismiss such claims, highlight a broader pattern explored in a recent study: "Trade as I Say, Not as I Do: Management Rhetoric and Insider Stock Sales." This research delves into the actions of executives who blame short sellers and reveals a striking contradiction—these executives are more likely to sell their own shares after making such claims. The study shows a 70% increase in insider sales following anti-short-selling rhetoric, behavior that contradicts their stated belief in the company’s undervaluation.

The Disconnect Between Rhetoric and Reality

The study, led by researchers from the University of Kansas and Appalachian State University, analyzed public statements, insider trading records, and financial filings of 4,292 companies, identifying 103 that employed anti-short-selling narratives between 2018 and 2019. It found that executives’ claims often precede insider sales and stock issuance, which dilute shareholder value. This pattern suggests that executives may be using anti-short-selling rhetoric to manipulate the market and facilitate their own stock sales, rather than genuinely addressing issues of undervaluation. The study also notes a significant increase in accounting restatements and financial irregularities in such companies, indicating deeper issues within the company rather than external factors like short-selling.

The Post-GameStop Era and the Rise of Anti-Short Rhetoric

The GameStop saga in 2021 marked a turning point in the use of anti-short-selling rhetoric. This event not only highlighted the power of retail investors but also created aceptive audience for narratives blaming short sellers. Companies began to exploit this sentiment, using it as a strategic tool to sway public opinion and create opportunities for raising capital. The study reveals that companies engaging in such rhetoric are 154% more likely to issue new stock, a move that typically dilutes shareholder value and often suppresses stock prices further. This behavior is particularly concerning as it undermines trust in financial markets and exploits less-informed retail investors.

The Broader Implications and Ethical Concerns

The study shines a light on the ethical dilemmas surrounding corporate executives using rhetoric to manipulate the market and their own shareholders. By framing short sellers as the enemy, executives may seek to create a smokescreen for insider selling and financial mismanagement. The findings suggest that anti-short-selling rhetoric is often a red flag for underlying issues within the company, such as accounting irregularities, which can have severe consequences for investors. The researchers emphasize the need for increased transparency and regulatory scrutiny to prevent such manipulative practices, ensuring a fair and equitable market for all participants.

Conclusion: A Call for Transparency and Accountability

In conclusion, the study underscores the importance of critically evaluating corporate rhetoric, particularly when it coincides with insider actions that contradict stated beliefs. The manipulation of anti-short-selling narratives not only misleads the market but also risks eroding trust in the financial system. As the study shows, the true issue often lies within the company’s financial health rather than external factors. Therefore, it is crucial for investors and regulators to remain vigilant, promoting transparency and accountability to safeguard the integrity of the markets.