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Activist Short Sellers vs. Financial Analysts: Competitive Claims of Expertise

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The methods and aims of activist short sellers and financial analysts are often at odds. In a highly competitive environment, there is a battle for narrative authority, with short sellers often criticizing analysts. New research examines this struggle, and how — or if — analysts respond to challenges.

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In a spectacular flameout in June 2020, an apparently successful German fintech, Wirecard, admitted that 1.9 billion euros on its books were fictitious and it was 3.5 billion euros in debt.

Anyone who had been paying attention wouldn’t have been surprised, as journalists and short sellers had been raising red flags for years. The Financial Times published a series of reports on the company’s suspect financial practices and short sellers, such as Zatarra Research, had also publicized grave concerns.

Yet sell-side analysts were almost uniformly positive on Wirecard until shortly before its collapse. Even German financial authorities at first launched criminal investigations of the journalists and short sellers rather than Wirecard executives. Months after the accounting fraud was revealed, Commerzbank fired its Wirecard analyst, who had been, according to reports, “one of the most bullish supporters of Wirecard” right up until the end.

The case illustrates, in dramatic fashion, how activist short sellers and financial analysts can have opposite views in an arena where narrative authority can affect share prices and the fortunes of companies. (Immediately post-scandal, Wirecard’s stock fell below 2 euros from 100 euros the week before.)

Who is the “expert”?

We became interested in this topic as a continuation of our previous work on accounting fraud and whistleblowers. Activist short sellers, who make public communications about their research on companies, point out weaknesses in companies and in the process criticize the typically positive reports of financial analysts. They profit when a company’s stock loses value.

Sell-side analysts, on the other hand, typically work for investment banks, where revenue is tied to underwriting new equity issues. Analysts therefore often feel they must maintain good relationships with the firms they follow, so it is to their advantage to offer upbeat equity research reports. 


In the volatile financial arena, with a surplus of information and prevailing uncertainty about the future, narrative authority assumes an important role in guiding investments. 


In the volatile financial arena, with a surplus of information and prevailing uncertainty about the future, narrative authority assumes an important role in guiding investments. Traditionally, sell-side analysts have held the role of experts.

Conflict of interest

Previous research in this area has focused on financial analysts only, and little work has been done on the role of narratives in financial markets. We wanted to look at the contest for narrative authority between these two participants.

In their reports, activist short sellers criticize analysts as having a lack of technical expertise, a lack of critical thinking — of lacking skepticism toward the firms they cover — and point to a conflict of interest on the part of analysts.

One short-seller report noted sarcastically, “Oops… We forgot that to be a successful sell-side analyst, your first job is to hide any possible data point that would paint your recent IPOs [initial public offerings] in a negative light.”

Surprisingly, our research found that despite criticism, analysts usually do not answer these attacks. Only about one-third respond to accusations, and then usually in a formal written response in an equity report. Those that do respond lob the same criticism at short sellers that short sellers aimed at them: that short sellers lack market expertise and objectivity, and that they are simply acting in their own self-interest, to bring the stock price down.

Behind the scenes

We wanted to find out what was going on behind the scenes in this struggle, so in addition to looking at short sellers and analysts reports, we conducted interviews with both activist short sellers and financial analysts to find out why analysts did not fire back more often. We discovered a number of reasons: They sometimes recognized that the short sellers were right about company weaknesses yet had to maintain good relationships with companies or risk the displeasure of their own management; they were held back by legal constraints; and they feared risks to their reputations if they defended their position but were proved wrong in the end.


Analysts sometimes recognized that the short sellers were right about company weaknesses yet had to maintain good relationships with companies.


As one analyst told us, “The moment you do respond is the moment you acknowledge the existence of something, and you increase the awareness.”

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Facing a threat to their reputation, many analysts prefer to avoid any visible reaction that would raise public awareness of analysts’ fragile narrative authority. Instead, many analysts choose an off-the-record approach, contacting some market participants, such as buy-side analysts or investment managers, in private. Many do not substantially revise their recommendation for a firm even when faced with short-seller criticism; rather, they might lower the target price for the stock — a less visible revision than completely altering their recommendation of the stock.


Despite the apparent antagonism, we found that there was mutual respect between the two parties.


Despite the apparent antagonism, we found in interviews that there was mutual respect between the two parties. Analysts admitted that short-seller criticism was often on target, while short sellers allowed that analysts were in a difficult position, being often unable to express their true opinion or lacking access to relevant information. 

We believe that more research is warranted, looking at how the two groups influence each other, and what those influences tell us in terms of the power of narrative authority in capital markets.


Understanding how narratives in financial markets are created and disseminated could be helpful for the market participation of ordinary investors, by helping them see the strategies behind the different approaches of activist short sellers and sell-side analysts —  and how these narratives have consequences for stock prices. Lawmakers and regulators might seek to examine how financial analysts are constrained by their business relationships, making it difficult for them to communicate freely about target firms.


We analyzed 442 activist short-seller reports, as well as equity research reports by analysts, and conducted 12 interviews with activist short sellers and analysts. In addition, using specialized databases we conducted a quantitative statistical analysis of analysts’ stock recommendations and target prices after short sellers’ attacks.
Based on an interview with Hervé Stolowy and Luc Paugam and their article “Competing for narrative authority in capital markets: Activist short sellers vs. financial analysts” (Forthcoming in Accounting, Organizations and Society), co-written with Yves Gendron.

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