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How Activist Short Sellers Police Financial Markets

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New research analyzes how activist short sellers’ “research reports” convince investors that the companies they target are overvalued. Professors Luc Paugam and Hervé Stolowy of HEC Paris and Yves Gendron of the Université Laval found that the share price of companies targeted by major activist short sellers drop by 11.2%, on average, over three days. Target firms are also more likely to be subsequently delisted, suspended from stock exchanges, or to go bankrupt. Who are activist short sellers and how do they police financial markets?

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Source: CNBC article (

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What do activist short sellers do?

Activist short sellers are a category of hedge fund activists who, unlike “long” activist investors, benefit from stock price declines and frequently act as whistleblowers denouncing alleged corporate frauds or financial misstatements. 

Activist short sellers attack suspicious, publicly-listed companies by disseminating reports primarily developed to denounce fraud, corporate malpractices, financial misreporting and flawed business models. Activist short sellers conduct deep investigative work and perform fundamental analysis on the public firms they attack.

They use the art of rhetoric and create a persuasive narrative to convince market participants that the firm they attack is severely overvalued. If they successfully convince other investors that a firm is overvalued, the stock price goes down, which helps them make money because they short sell (directly or indirectly) the shares of the attacked firm before releasing their report. 

A well-known example is Gotham City Research, which alleged in 2014 that the Spanish firm Let’s Gowex was perpetrating a massive accounting fraud. Let’s Gowex filed for voluntary insolvency five days after the short seller published an incriminating report. 

Another example is Iceberg Research, which in 2015 started releasing a series of research reports targeting the (then) largest Asian commodity trader: Noble Group. The target firm subsequently booked large impairments, was downgraded by credit rating agencies, restructured its debt, and faced a 65% decline in its stock price in 2015 alone. The target firm was eventually delisted. 

The research also focuses on four other major activist short sellers: Citron Research, Copperfield Research, Glaucus Research, and Muddy Waters Research


crocodile - willyam-AdobeStock
(Photo ©willyam on Adobe Stock)


Why are the narratives of fraud reports so important to study?

The rhetoric used by activists short sellers helps them gain credibility in the eyes of their target audience: investors. Their rhetoric also helps them demonstrate the validity of their claims and disseminate their stories to a broader audience of investors. The analysis of such narratives belongs to the recent "narrative economics" theory, developed in 2019 by Nobel Prize Laureate Robert Shiller (explained in his best-selling book, «Narrative Economics: How Stories Go Viral and Drive Major Economic Events»). This theory argues that economic narratives play a significant role in explaining economic decisions such as investments.

We looked at the impact activist short-sellers have on the markets through the publication of their “research reports”, but more specifically, through analyzing the narratives that are used in these reports, and how these persuade market participants of the validity of their claims. 

Interestingly, even the names of these activist organizations are part of their rhetorical strategies, which are based on superheroes and justice (Gotham City Research), illusion (Copperfield Research), revealing low quality products (Citron Research), or finding the truth in an unclear area (Muddy Waters) or that something is hidden (Iceberg research). Glaucus Research even has a double meaning related to Greek mythology (Glaucus is a god of the sea blessed with the power of prophecy) and an animal (the Glaucus Atlanticus is a small sea slug with a painful sting who prey on other larger pelagic organisms).


We analyzed the narratives used in 383 research reports targeting 171 firms from six prominent activist short sellers.


To understand how they shaped the press and investors’ opinions, we analyzed the narratives used in 383 research reports targeting 171 firms from six prominent activist short sellers, and three first-hand interviews with activist short sellers. We could assess the language and common persuasion techniques used by activist short sellers.

So do the narratives produced by activist short sellers really affect the companies’ market value?

Yes, significantly. The research reports produced by activist short sellers include narratives that have a huge impact on the media, investors and ultimately the market value of the companies targeted. We found that activist short sellers’ core arguments resonate in the media. For instance, 85% of these reports are covered by the media shortly after their publication. Companies targeted in short sellers’ reports exhibit significant market value losses which last well over six months after publication. 

We have observed that three days after a report is published, the average market-adjusted stock return of companies targeted falls by 11.2%: this represents a reduction of $416 million of market value on average. Two months after publication, cumulative abnormal returns are persistently negative: -14.5%. This continues into a period of six months with cumulative abnormal returns of -22.6%, on average. 

Strikingly, when we collected stock market data for attacked firms in the summer of 2018, we also found that close to half of attacked firms were classified as either bankrupt, delisted, or suspended from stock exchanges subsequently to the publication of activist short sellers’ reports.


We found that close to half of targeted firms attacked were either classified as either bankrupt, delisted, or suspended from stock exchanges.


What are the key characteristics of activist short sellers’ narratives?

Drawing on Aristotle’s rhetoric, our research shows that short sellers not only rely on logical arguments (logos) but also establish their credibility (ethos) and rely on the audience’s emotions (pathos) to develop a convincing narrative. For instance, the narratives aim to generate strong negative feelings about target firms or target firms’ management by invoking doubt, concern, disgust, anger, and antipathy. Further, short sellers’ narratives sometimes seek to engender other feelings such as amusement at the expense of target firms, or fear among investors.

This shows that persuasion is more complex than the procedural disclosure of factual information and figures; subtle forms of persuasion may matter much—such as the use of arguments aiming to establish the credibility of activist short sellers and arguments aiming at appealing to investors’ emotions.

How do activist short sellers publish their reports?

Activist short sellers tend to publish their reports on their own websites, in popular financial forums and on social media platforms such as Twitter. Frequently, the results of their reports get picked up by other media outlets, which would then magnify the impact of the results published and, importantly, the convincing narratives used. 

Can activist short sellers address fraud?

Though efforts have been made and technology developed to detect and address fraud, it is generally seen as an enduring problem. In this context, the activities of activist short sellers might be welcomed practices in the fight against financial irregularities. Through this paper, we show that activist short sellers are endowed with a potential to convince a fair number of market participants that fraudulent behavior took place in specific settings. 

We found that private sector practices, such as those of activist short sellers may indeed able to play an important role in financial markets, by demonstrating that fraud can be identified and acted upon through the verdict of the market.


We found that private sector practices are indeed able to play an important role in financial markets, by demonstrating that fraud can be identified and acted upon through the verdict of the market.


Additionally, activist short sellers have the potential to address corporate fraud when compared to the failures of traditional gatekeepers such as auditors, boards or regulators, as we can see with the consequences of the Wirecard case.

However, we notice that authorities such as market regulators tend to question the credibility of the messengers rather than the sometimes fraudulent target firms. Activists may be viewed as enemies because they influence the investors sometimes through what can be considered as aggressive tactics. Yet, they also often expose frauds. In the Wirecard fraud case, the BaFin, the German market regulator, issued a ban on short selling the shares of this company in 2019. In 2020, this decision taken by the market regulator is severely criticized. Our research therefore may help balance the views regarding the perception of activist short sellers.



Our empirical analysis exploits both qualitative and quantitative methods for a comprehensive dataset of 383 research reports targeting 171 unique firms, and three first-hand interviews with activist short sellers. Drawing on Aristotle’s rhetoric, we first examine how activist short sellers use narratives in striving to convince other investors that the target firms are overvalued. Specifically, we search the documents produced by activist short sellers for stylized narratives related to credibility-based (ethos), emotions-based (pathos), and logic-based (logos) rhetorical strategies. In a second step, to assess the impact of these strategies, we examine the extent to which the activist short sellers’ rhetorical strategies resonate in 3,665 press articles.


Focus - Application pour les marques
Our study points to activist short sellers’ narratives playing a major role in policing financial markets. We show that activist short sellers, as dissenting market participants, produce narratives that go beyond the language of formal rationality – as they strive to reveal new information and frame it persuasively, in order to destabilize the extent of trustworthiness surrounding target firms.
Based on an interview with Luc Paugam and Hervé Stolowy of HEC Paris and on their article, “Deploying Narrative Economics to Understand Financial Market Dynamics: An Analysis of Activist Short Sellers’ Rhetoric”, coauthored with Yves Gendron of the Université Laval, published in Contemporary Accounting Research in 2021.

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