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 Preferential trade agreements enhance global trade at the expense of its resilience
17.02.2017 | International Institute for Applied Systems Analysis (IIASA)

nachricht How Strong Brands Translate into Money
15.11.2016 | Kühne Logistics University - Wissenschaftliche Hochschule für Logistik und Unternehmensführung

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: Breakthrough with a chain of gold atoms

In the field of nanoscience, an international team of physicists with participants from Konstanz has achieved a breakthrough in understanding heat transport

In the field of nanoscience, an international team of physicists with participants from Konstanz has achieved a breakthrough in understanding heat transport

Im Focus: DNA repair: a new letter in the cell alphabet

Results reveal how discoveries may be hidden in scientific “blind spots”

Cells need to repair damaged DNA in our genes to prevent the development of cancer and other diseases. Our cells therefore activate and send “repair-proteins”...

Im Focus: Dresdner scientists print tomorrow’s world

The Fraunhofer IWS Dresden and Technische Universität Dresden inaugurated their jointly operated Center for Additive Manufacturing Dresden (AMCD) with a festive ceremony on February 7, 2017. Scientists from various disciplines perform research on materials, additive manufacturing processes and innovative technologies, which build up components in a layer by layer process. This technology opens up new horizons for component design and combinations of functions. For example during fabrication, electrical conductors and sensors are already able to be additively manufactured into components. They provide information about stress conditions of a product during operation.

The 3D-printing technology, or additive manufacturing as it is often called, has long made the step out of scientific research laboratories into industrial...

Im Focus: Mimicking nature's cellular architectures via 3-D printing

Research offers new level of control over the structure of 3-D printed materials

Nature does amazing things with limited design materials. Grass, for example, can support its own weight, resist strong wind loads, and recover after being...

Im Focus: Three Magnetic States for Each Hole

Nanometer-scale magnetic perforated grids could create new possibilities for computing. Together with international colleagues, scientists from the Helmholtz Zentrum Dresden-Rossendorf (HZDR) have shown how a cobalt grid can be reliably programmed at room temperature. In addition they discovered that for every hole ("antidot") three magnetic states can be configured. The results have been published in the journal "Scientific Reports".

Physicist Dr. Rantej Bali from the HZDR, together with scientists from Singapore and Australia, designed a special grid structure in a thin layer of cobalt in...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

Booth and panel discussion – The Lindau Nobel Laureate Meetings at the AAAS 2017 Annual Meeting

13.02.2017 | Event News

Complex Loading versus Hidden Reserves

10.02.2017 | Event News

International Conference on Crystal Growth in Freiburg

09.02.2017 | Event News

 
Latest News

Stingless bees have their nests protected by soldiers

24.02.2017 | Life Sciences

New risk factors for anxiety disorders

24.02.2017 | Life Sciences

MWC 2017: 5G Capital Berlin

24.02.2017 | Trade Fair News

VideoLinks
B2B-VideoLinks
More VideoLinks >>>