Short (finance) - Views of Short Selling

Views of Short Selling

Advocates of short selling argue that the practice is an essential part of the price discovery mechanism. Financial researchers at Duke University said in a study that short interest is an indicator of poor future stock performance (the self-fulfilling aspect) and that short sellers exploit market mistakes about firms' fundamentals.

Such noted investors as Seth Klarman and Warren Buffett have said that short sellers help the market. Klarman argued that short sellers are a useful counterweight to the widespread bullishness on Wall Street, while Buffett believes that short sellers are useful in uncovering fraudulent accounting and other problems at companies.

Shortseller James Chanos received widespread publicity when he was an early critic of the accounting practices of Enron Corp. Chanos responds to critics of short-selling by pointing to the critical role they played in identifying problems at Enron, Boston Market and other "financial disasters" over the years. In 2011, research oriented short sellers were widely acknowledged for exposing the China stock frauds.

Commentator Jim Cramer has expressed concern about short selling and started a petition calling for the reintroduction of the uptick rule. Books like Don't Blame the Shorts by Robert Sloan and Fubarnomics by Robert E. Wright suggest Cramer exaggerated the costs of short selling and underestimated the benefits, which may include the ex ante identification of asset bubbles.

Individual short sellers have been subject to criticism and even litigation. Manuel P. Asensio, for example, engaged in a lengthy legal battle with the pharmaceutical manufacturer Hemispherx Biopharma.

Several studies of the effectiveness of short selling bans indicate that short selling bans do not contribute to more moderate market dynamics.