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Beating short sellers by better disclosure

Another short selling attack - this time on Noble Group

Tuesday, February 17, 2015 - 11:22

Noble this week has become the latest victim of a short selling attack. The seller, Iceberg Research, over the weekend issued a 17-page report alleging that Noble has exploited an accounting loophole to make its financials look better than they really are. This attack is the third on a commodities firm in recent times, the first being Muddy Waters' on Olam International and then Glaucus Research on China Minzhong. It's interesting that companies in this sector seem to be the favourite targets of such criticisms, though as one analyst said, it's because there is so much uncertainty with future cash flows since these could be affected by bad weather and many unpredictable variables. It's also interesting to ponder the question - do short sellers have a part to play in the market's ecosystem? Or are they simply wealth destroyers?

In my view short sellers do play an important role - but their activities have to be curbed, or at least monitored within set parameters. On the plus side is that they help enhance market efficiency - they alert investors to issues that may not have been highlighted before and in so doing, help keep managements on their toes. Also, note that the short-sellers' potential profit is limited to the share price falling to zero, but their potential loss is infinite. 

On the minus side, if their analysis is wrong and if investors panic-sell, then unwarranted damage can be wrought.

Regulators here have therefore  taken the correct approach to short-selling by enhancing disclosure rules. On balance, this is the best approach, though of course, more can be done on this front. More detailed disclosures would be welcome. More later on this point.