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

nachricht Demographic change depresses tax revenues
04.11.2016 | Fraunhofer-Institut für Angewandte Informationstechnik FIT

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: Electron highway inside crystal

Physicists of the University of Würzburg have made an astonishing discovery in a specific type of topological insulators. The effect is due to the structure of the materials used. The researchers have now published their work in the journal Science.

Topological insulators are currently the hot topic in physics according to the newspaper Neue Zürcher Zeitung. Only a few weeks ago, their importance was...

Im Focus: Significantly more productivity in USP lasers

In recent years, lasers with ultrashort pulses (USP) down to the femtosecond range have become established on an industrial scale. They could advance some applications with the much-lauded “cold ablation” – if that meant they would then achieve more throughput. A new generation of process engineering that will address this issue in particular will be discussed at the “4th UKP Workshop – Ultrafast Laser Technology” in April 2017.

Even back in the 1990s, scientists were comparing materials processing with nanosecond, picosecond and femtosesecond pulses. The result was surprising:...

Im Focus: Shape matters when light meets atom

Mapping the interaction of a single atom with a single photon may inform design of quantum devices

Have you ever wondered how you see the world? Vision is about photons of light, which are packets of energy, interacting with the atoms or molecules in what...

Im Focus: Novel silicon etching technique crafts 3-D gradient refractive index micro-optics

A multi-institutional research collaboration has created a novel approach for fabricating three-dimensional micro-optics through the shape-defined formation of porous silicon (PSi), with broad impacts in integrated optoelectronics, imaging, and photovoltaics.

Working with colleagues at Stanford and The Dow Chemical Company, researchers at the University of Illinois at Urbana-Champaign fabricated 3-D birefringent...

Im Focus: Quantum Particles Form Droplets

In experiments with magnetic atoms conducted at extremely low temperatures, scientists have demonstrated a unique phase of matter: The atoms form a new type of quantum liquid or quantum droplet state. These so called quantum droplets may preserve their form in absence of external confinement because of quantum effects. The joint team of experimental physicists from Innsbruck and theoretical physicists from Hannover report on their findings in the journal Physical Review X.

“Our Quantum droplets are in the gas phase but they still drop like a rock,” explains experimental physicist Francesca Ferlaino when talking about the...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

ICTM Conference 2017: Production technology for turbomachine manufacturing of the future

16.11.2016 | Event News

Innovation Day Laser Technology – Laser Additive Manufacturing

01.11.2016 | Event News

#IC2S2: When Social Science meets Computer Science - GESIS will host the IC2S2 conference 2017

14.10.2016 | Event News

 
Latest News

Researchers identify potentially druggable mutant p53 proteins that promote cancer growth

09.12.2016 | Life Sciences

Scientists produce a new roadmap for guiding development & conservation in the Amazon

09.12.2016 | Ecology, The Environment and Conservation

Satellites, airport visibility readings shed light on troops' exposure to air pollution

09.12.2016 | Health and Medicine

VideoLinks
B2B-VideoLinks
More VideoLinks >>>