This paper explores the tentativeness of naked short selling to exploit company profitability, finding that naked short selling investors adjust their short positions prior to the release of a company’s second quarter financial statement. Specifically, we examine whether the company is taking advantage of underwriter error, a time distortion caused by quarterly filings. We also examine the relationship between share price and intrinsic value and the impact of financial reporting methods and accounting policies. Finally, we address issues surrounding forward-looking stock price predictions and liquidity.
Market Fluctuations. As we noted at the beginning, this paper is the first attempt to quantitatively investigate the relationship between share price and firm investment efficiency. Our main findings are that over the past three decades, there has been a substantial amount of government intervention (either direct or indirect) into the stock markets to support major firms’ investments. The Great Recession resulted in a number of government interventions, including the Troubled Asset Relief Program (TARP), financial regulatory frameworks, and bailouts. While many of these interventions failed to bring about positive long-term effects for share prices, some were successful in raising investment costs for large firms relative to their competitors.
In light of the Great Recession, many firms may be losing confidence in their own ability to manage risk, which can reduce liquidity and exacerbate share price fluctuations. As this process continues, there is little evidence that there will be a decrease in financial crisis surprises or the impact that these shocks have on firm shares. Although the economic stimulus package did not directly influence share prices, it seems likely that future attempts to increase government intervention (or attempts to undo previous government interventions) will continue to increase the costs associated with risky corporate bonds.
The Financial Reporting Standards Board (FRBS) is currently examining the effect of the economic stimulus package on investment decisions. The regulator is examining the role that banks play in directing commercial borrowing and setting investment objectives. The regulator is also examining the role that firms play in determining the structure and terms of their debt obligations.
Many investors and commentators are surprised by the absence of an apparent impact on share prices as a result of government-intervened firms’ investment decisions. The absence of an apparent effect may be due to a variety of different factors. Changes in banking supervision may have had a limited, temporary impact on share issuance while institutional investors and bankers continue to retain substantial portions of the capital markets. Also, the extensive liquidity of the financial markets has insulated investment from any change in government policy.
There are several major reasons why firms have been reluctant to take investment risks during the current economic crisis period. One of the key deterrents has been loss of investor confidence regarding the solvency of major financial institutions. The ongoing study of the impact of government intervention on firm investments will provide important insight into the optimal time to make large investment decisions.
