Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

When to rein in the stock market

05.07.2012
The stock market should be regulated only during times of extraordinary financial disruptions when speculators can destroy healthy businesses, according to a new study led by a Michigan State University scholar.
The study, in the Journal of Financial Economics, is one of the first to suggest when the U.S. Securities and Exchange Commission should get involved in the market.

The answer: rarely. The SEC should step in only when outside financial disruptions make it impossible for large shareholders to fend off “short sellers” – or speculators betting a company’s stock value will decrease, said Naveen Khanna, finance professor in MSU’s Broad College of Business.

Otherwise, the market regulates itself just fine due to the healthy tug-of-war between large shareholders and short sellers, he said.

“The government should only get involved during times of severe market disruptions,” Khanna said. “And even then, the government’s involvement should be only temporary.”

An example of a severe disruption was the global financial crisis of 2008. The SEC stepped in to regulate short selling for a temporary period, which was the right move even though highly criticized at the time, Khanna said.

In short selling, an investor “borrows” stocks from a broker, sells the shares and gets the proceeds. Later on, the investor must cover the “short” by buying back the same number of shares and returning them to the broker. If the price has dropped, as anticipated, the short seller buys back the stock at the lower price and makes a profit on the difference.

During the 2008 crisis, the credit market froze, preventing large shareholders from buying up stock in their companies to counteract the short sellers. Khanna and other experts believe predatory short selling helped sink the massive investment bank Lehman Brothers and damaged other large firms.

Short sellers play an important role by bringing to light negative – but necessary – information about a company, such as failing business contracts or flagging production. Khanna said it is only during significant economic disruptions that short selling can lead to a company’s “death spiral” – when short sellers exploit the disruption to lower an otherwise healthy company’s stock price to the point that it can no longer do business and is forced into bankruptcy.

At the same time, overregulation of short selling could dissuade large shareholders from battling the short sellers, leaving it up to the government instead. This so-called “moral hazard” can destroy company value as well.

“We overregulate in this country,” Khanna said. “The government has the best of intentions, but it rarely works out.”

Professor Richmond Mathews from the University of Maryland co-authored the study, “Doing battle with short sellers: The conflicted role of blockholders in bear raids.”

Michigan State University has been working to advance the common good in uncommon ways for more than 150 years. One of the top research universities in the world, MSU focuses its vast resources on creating solutions to some of the world’s most pressing challenges, while providing life-changing opportunities to a diverse and inclusive academic community through more than 200 programs of study in 17 degree-granting colleges.

Andy Henion | EurekAlert!
Further information:
http://www.msu.edu

More articles from Business and Finance:

nachricht Microtechnology industry is hiring – positive developments of past years continue
09.04.2018 | IVAM Fachverband für Mikrotechnik

nachricht RWI/ISL-Container Throughput Index with minor decline on a high overall level
20.03.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Molecules Brilliantly Illuminated

Physicists at the Laboratory for Attosecond Physics, which is jointly run by Ludwig-Maximilians-Universität and the Max Planck Institute of Quantum Optics, have developed a high-power laser system that generates ultrashort pulses of light covering a large share of the mid-infrared spectrum. The researchers envisage a wide range of applications for the technology – in the early diagnosis of cancer, for instance.

Molecules are the building blocks of life. Like all other organisms, we are made of them. They control our biorhythm, and they can also reflect our state of...

Im Focus: Spider silk key to new bone-fixing composite

University of Connecticut researchers have created a biodegradable composite made of silk fibers that can be used to repair broken load-bearing bones without the complications sometimes presented by other materials.

Repairing major load-bearing bones such as those in the leg can be a long and uncomfortable process.

Im Focus: Writing and deleting magnets with lasers

Study published in the journal ACS Applied Materials & Interfaces is the outcome of an international effort that included teams from Dresden and Berlin in Germany, and the US.

Scientists at the Helmholtz-Zentrum Dresden-Rossendorf (HZDR) together with colleagues from the Helmholtz-Zentrum Berlin (HZB) and the University of Virginia...

Im Focus: Gamma-ray flashes from plasma filaments

Novel highly efficient and brilliant gamma-ray source: Based on model calculations, physicists of the Max PIanck Institute for Nuclear Physics in Heidelberg propose a novel method for an efficient high-brilliance gamma-ray source. A giant collimated gamma-ray pulse is generated from the interaction of a dense ultra-relativistic electron beam with a thin solid conductor. Energetic gamma-rays are copiously produced as the electron beam splits into filaments while propagating across the conductor. The resulting gamma-ray energy and flux enable novel experiments in nuclear and fundamental physics.

The typical wavelength of light interacting with an object of the microcosm scales with the size of this object. For atoms, this ranges from visible light to...

Im Focus: Basel researchers succeed in cultivating cartilage from stem cells

Stable joint cartilage can be produced from adult stem cells originating from bone marrow. This is made possible by inducing specific molecular processes occurring during embryonic cartilage formation, as researchers from the University and University Hospital of Basel report in the scientific journal PNAS.

Certain mesenchymal stem/stromal cells from the bone marrow of adults are considered extremely promising for skeletal tissue regeneration. These adult stem...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

Invitation to the upcoming "Current Topics in Bioinformatics: Big Data in Genomics and Medicine"

13.04.2018 | Event News

Unique scope of UV LED technologies and applications presented in Berlin: ICULTA-2018

12.04.2018 | Event News

IWOLIA: A conference bringing together German Industrie 4.0 and French Industrie du Futur

09.04.2018 | Event News

 
Latest News

Structured light and nanomaterials open new ways to tailor light at the nanoscale

23.04.2018 | Physics and Astronomy

On the shape of the 'petal' for the dissipation curve

23.04.2018 | Physics and Astronomy

Clean and Efficient – Fraunhofer ISE Presents Hydrogen Technologies at the HANNOVER MESSE 2018

23.04.2018 | Trade Fair News

VideoLinks
Science & Research
Overview of more VideoLinks >>>