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: Self-repairing batteries

UTokyo engineers develop a way to create high-capacity long-life batteries

Engineers at the University of Tokyo continually pioneer new ways to improve battery technology. Professor Atsuo Yamada and his team recently developed a...

Im Focus: Quantum Cloud Computing with Self-Check

With a quantum coprocessor in the cloud, physicists from Innsbruck, Austria, open the door to the simulation of previously unsolvable problems in chemistry, materials research or high-energy physics. The research groups led by Rainer Blatt and Peter Zoller report in the journal Nature how they simulated particle physics phenomena on 20 quantum bits and how the quantum simulator self-verified the result for the first time.

Many scientists are currently working on investigating how quantum advantage can be exploited on hardware already available today. Three years ago, physicists...

Im Focus: Accelerating quantum technologies with materials processing at the atomic scale

'Quantum technologies' utilise the unique phenomena of quantum superposition and entanglement to encode and process information, with potentially profound benefits to a wide range of information technologies from communications to sensing and computing.

However a major challenge in developing these technologies is that the quantum phenomena are very fragile, and only a handful of physical systems have been...

Im Focus: A step towards probabilistic computing

Working group led by physicist Professor Ulrich Nowak at the University of Konstanz, in collaboration with a team of physicists from Johannes Gutenberg University Mainz, demonstrates how skyrmions can be used for the computer concepts of the future

When it comes to performing a calculation destined to arrive at an exact result, humans are hopelessly inferior to the computer. In other areas, humans are...

Im Focus: Recording embryonic development

Scientists develop a molecular recording tool that enables in vivo lineage tracing of embryonic cells

The beginning of new life starts with a fascinating process: A single cell gives rise to progenitor cells that eventually differentiate into the three germ...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

SEMANTiCS 2019 brings together industry leaders and data scientists in Karlsruhe

29.04.2019 | Event News

Revered mathematicians and computer scientists converge with 200 young researchers in Heidelberg!

17.04.2019 | Event News

First dust conference in the Central Asian part of the earth’s dust belt

15.04.2019 | Event News

 
Latest News

Cement as a climate killer: Using industrial residues to produce carbon neutral alternatives

20.05.2019 | Materials Sciences

When bees are freezing

20.05.2019 | Life Sciences

Machine learning speeds modeling of experiments aimed at capturing fusion energy on Earth

20.05.2019 | Power and Electrical Engineering

VideoLinks
Science & Research
Overview of more VideoLinks >>>