Authors: Kranz, Sebastian
Löffler, Gunter
Posch, Peter N.
Title: Predatory short sales and bailouts
Language (ISO): en
Abstract: This paper extends the literature on predatory short selling and bailouts through a joint analysis of the two. We consider a model with informed short sales, as well as uninformed predatory short sales, which can trigger the inefficient liquidation of a firm. We obtain several novel results: A government commitment to bail out insolvent firms with positive probability can increase welfare because it selectively deters predatory short selling without hampering desirable informed short sales. Contrasting a common view, bailouts can be optimal ex ante but undesirable ex post. Furthermore, bailouts in our model are a better policy tool than short selling restrictions. Welfare gains from the bailout policy are unevenly distributed: shareholders gain while taxpayers lose. Bailout taxes allow ex-ante Pareto improvements.
Subject Headings: government bailouts
short sale bans
predatory trading
short sales
Issue Date: 2017
Appears in Collections:Sonderforschungsbereich (SFB) 823

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