CEO protective responses to short seller attacks at rival firms

Abstract

Short sellers prosper by betting against the interests of shareholders and managers of public firms. In recent years, however, some short sellers have escalated the intensity of short selling by organizing campaigns that provoke negative market reactions toward public firms. Prior studies have focused on the ex-post consequences of short selling as opposed to the implicit tension between firms and short sellers before the actual short selling begins. As a result, extant research relies largely on market-wide short interest as a proxy for short selling. However, this approach ignores the efforts by firms in preventing, as opposed to responding to, short selling threats. To fill this knowledge gap, I draw on protection motivation theory to explore the preventive behavior in response to the threat of activist short sellers. The primary focus of this dissertation is on the extent to which the processes of threat appraisal (i.e., severity and vulnerability) and coping appraisal (i.e., response efficacy and self-efficacy) influence CEO language optimism and certainty of firms that face the threat of a short attack. As a supplement to this focus, I also examine the ultimate effectiveness of CEO language optimism and certainty as protection mechanisms against short selling pressure and short attack threats. I test my hypotheses with a sample of 2,230 rival firms between 2007 and 2020 and discuss the findings and their implications.