Nasty, brutish and short

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: It is difficult being a short-seller. Most shareholders and managers agree that you are an important part of an efficient stockmarket—until you dump shares in their company. Then things can turn nasty. “We appreciate that, asshole,” barked Enron’s chief executive, on a public conference call, to a suspected short-seller who had complained about the lack of a published balance sheet. Sometimes bears need even thicker skins. In 1995 Malaysia’s finance ministry reportedly proposed caning as a punishment for abusive shorting.

Since markets turned sour last year, plenty of financial firms, from Bear Stearns and Lehman Brothers in America, to Babcock & Brown and Macquarie Group in Australia, have seen increased shorting. A few have grumbled about unfair speculation. In February MBIA, an embattled bond insurer, complained to a congressional committee that “self-interested parties have gone to substantial effort to undermine the market confidence that is critical to MBIA’s business”. Yet the regulatory response was muted until Britain’s Financial Services Authority (FSA), a City watchdog, abruptly announced new disclosure rules for anyone short-selling the stock of companies in the delicate process of issuing shares to raise capital. If market abuse does not stop with this new regime, in force from June 20th, the FSA will take further steps. Since it intervened, British banks raising emergency capital have seen their shares rise.

A reaction against short-selling often follows big stockmarket declines. Congress held hearings in the United States after the crashes of 1929 and 1987, some Asian governments imposed restrictions after the regional crisis in the late 1990s, and America’s Securities and Exchange Commission (SEC), the FSA and other national regulators investigated allegations of abuse after September 11th, 2001.

However, since the 1970s the best-known official studies in the West have shown that short-selling is broadly a force for good, aiding price discovery and preventing shares from becoming overvalued. That conclusion is supported by academic research. After examining the run-up to the crash of 1929, Owen Lamont of Yale University and DKR Fusion, a hedge fund, found that the more investors wished to short-sell a stock, the more overvalued it proved to be. In another study of American firms since the late 1970s, Mr Owen found that companies that attack short-sellers, with belligerent statements or harsher tactics, are likely to go on to underperform the wider market.