Responding Publicly to Short Sellers

Most business executives would agree with economists and investment professionals that in principle the short selling of securities can serve a useful purpose by providing liquidity to the market and countering so-called irrational exuberance. However, when it comes to their own companies, those same executives might very well blame the shorts for damaging their ability to create shareholder value and build support for their company’s prospects, particularly when the short sellers go public with their case against the firm.

Investor relations professionals can then be faced with a CEO who understandably wants to refute the short case, and critique the motives and methods of the short sellers. Yet before taking on short sellers in a public forum, it is important to determine two things. First, are their public statements or reports influencing other investors, and by how much? Second, and more importantly, how will the investment community perceive a company’s public response to the debate?

We note the recent case of a CEO of a top-performing company with a stock price to match who issued a lengthy, thoughtful and well-written rebuttal to a short-seller’s thesis that laid out the case as to why shares were overvalued. Interestingly, the seller’s report had not interrupted the upward momentum of the stock price. On the other hand, while the CEO’s rebuttal was characterized by some as well reasoned, an influential blog cited it as a “warning signal” reflecting possible concern by management about their company’s future.

In most cases we see little to gain from directly responding to short sellers. In fact, sparring with them can be counter-productive and time consuming, and might lead to a lengthy give-and-take that only raises awareness of the short case and bolsters the profile of the seller.

Worse, it can make management look defensive and even desperate. Much more can be gained from building constructive relationships with analysts and investors, and consistently communicating a strong investment thesis. We believe it is important to fully analyze the short thesis, and perhaps point out errors to its source. But generally it’s preferable to address the negative argument through information shared via traditional IR channels and to enlist the support of third parties (including sell-side analysts), and not put forth a point-by-point rebuttal to the contrarian viewpoint.

For more than 25 years, Lippert/Heilshorn & Associates has helped clients develop effective IR programs, overcome challenges and achieve meaningful results by focusing on positive strategies and activities.