This paper explores the tellativeness of secondary public offering (PPS) transactions on finding out company investment fraudulence, identifying fraudulent short selling transactions, and utilising their information to exploit company investment fraudulence. As a first step, we consider a case study of GlaxoSmithKline (GSK), a German pharmaceutical giant which merged with AstraZeneca in February 2021. GlaxoSmithKline had previously engaged in short selling, in which it sold its own shares in the target company’s shares prior to the merger, in order to manipulate the price of the company’s stock. The subsequent investigation by the New York Attorney General’s office identified this as one of the fraudulent transactions in history. The report concluded that GlaxoSmithKline’s deception was material to the firm’s downfall.
Using secondary data, we analyse four similar cases. All four firms fall into a category where stock market behavior is highly chaotic, characterized by sharp price fluctuations. The analysis shows that firms which engage in Firm Investment Fraud tend to takeonic risks, i.e., they attempt to reduce the risk of loss by taking less than the full profit in the target company’s stock. The most telling feature of the data is that in all four cases, the Firm Investment Fraud is exposed when the target firm announces earnings disappointingly low. The paper also notes that in all four cases the firm whose shares were shorted decides to reverse the position quickly and resume normal trading, well ahead of the target firm’s announcement. Thus, it is clear from the empirical results that the timing of Firm Investment Fraud is critical for investors to take advantage of this activity before shares in the target firm plummet.
However, the empirical results do not reveal the time delays and various other factors that might affect how firms decide to trade, or when they decide to sell their shares. To explore the reasons behind this phenomenon, we draw on the literature on firm decision making. Most studies find that firms are slow to react to changing external economic conditions. They are also slow to adjust their internal processes, so that stock markets are able to absorb shocks to share prices across firms.
By injecting large amounts of cash into the economy via government interventions, the Federal Reserve can ameliorate these problems, forcing firms to increase their capital accumulation rate more quickly, and generating faster overall economic growth. But there are limits to this approach, as government intervention does not appear to have a major effect on firms’ investments, liquidity or employment. Once a firm has received large government injections, employment will probably increase only slightly, while capital costs would rise very significantly. Moreover, the impact of government intervention is likely to be very temporary, as the effects wear off after a few years. If, for example, the unemployment rate rises by a certain percentage point, the impact on capital costs will disappear once the employment rate falls back to its original value, implying that firms’ investments will not be affected by the sudden rise in unemployment.
A major drawback of using fiscal policy to offset the effects of external factors on firms’ investments is that it tends to create a significant amount of economic volatility. Monetary policy is, by definition, considered to be a very sensitive tool, and investors become extremely uncertain when it comes to its use in the face of sudden changes in fiscal policy. This uncertainty may act as a barrier to investment efficiency, causing firms to divert their resources away from other, more productive activities, leading to lower overall economic performance.
As long as the aggregate demand, productivity and employment of the economy remains above expectations, then the effects of government intervention will be limited. In the face of a sudden fall in investment, firms may feel compelled to change their strategies, leading to slower overall growth, as well as higher fluctuations in asset prices. On the other hand, long-term trends in investment productivity and employment should be above expectations, allowing for smooth economic adjustment. This, in turn, should support firm investments, leading to both greater employment and higher output per dollar in the short and medium term.