March 14, 2007
Professors Hu and Black on Short Selling
Professor Hu and Black have published three pieces on short selling (University of Southern California Law Review, Journal of Financial Economics, and Business Law Journal) and recommended more regulation of the practice. All three articles discount the ability of the market to self police. I have made the point in a recent piece in our Entrepreneurial Journal. Those who loan shares to short sellers charge a fee and the fee will increase with the risk that those who borrow the shares will vote or otherwise use the shares to hurt the company. Those loaning the shares will get them back and are interested in their value. If so, those who short shares to hurt a company will suffer the economic consequences, just as a shareholder would, in the increased fees paid to the lender of the shares. There is evidence that fee increase do occur around short contracts entered into on the eve of record dates for example.
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