Deploying Narrative Economics to Understand Financial Market Dynamics: An Analysis of Activist Short Sellers' Rhetoric*

Abstract

We investigate how activist short sellers (AShSs) expose publicly listed firms in an increasingly popular form of “research reports” openly denouncing alleged frauds, flawed business models, accounting irregularities, and wrongdoings. We focus on six AShSs that issued research reports that often led to a strong negative market reaction. Our empirical analysis exploits both qualitative and quantitative methods for a comprehensive data set of 383 research reports targeting 171 unique firms, and 3 firsthand interviews with AShSs. Drawing on Aristotle's rhetoric, we first examine how AShSs use narratives in striving to convince other investors that the target firms are overvalued. Specifically, we search the documents produced by AShSs for stylized narratives related to credibility‐based (ethos), emotions‐based (pathos), and logic‐based (logos) rhetorical strategies. To assess the impact of these strategies, we examine the extent to which the AShSs' rhetorical strategies resonate in 3,665 press articles. As expected, the press often refers to logos‐based arguments. Interestingly, the press also frequently brings up pathos‐based and ethos‐based statements. Considering the importance of the press in shaping investors' opinions, our study points to AShSs' narratives playing a major role in policing financial markets. Theoretically, we show that AShSs, as dissenting market participants, produce narratives that go beyond the language of formal rationality—as they strive to reveal new information and frame it persuasively, in order to destabilize the extent of trustworthiness surrounding target firms.

Breaking incommensurability boundaries? On the production and publication of interparadigmatic research

“…Methodologically, the activist short sellers' reports are analyzed in ways that recognize the role of the researchers' subjectivity in making sense of sentences/paragraphs. Yet, we found many indications of paradigmatic cohabitation in Paugam et al (2021). The number of documents analyzed (383 short sellers' research reports and 3,665 press articles, to be examined interpretively through Aristotle's rhetoric categories) goes far beyond interpretive conventions.…”

“…The three of us wrote the second article. For analytic purposes, it is important to note that we initially had the idea of developing the present essay in December 2020, when Paugam et al (2021) had already been accepted for publication (November 9, 2020). Although it was not entirely clear to us before undertaking the present essay, we suspected the two studies differed markedly in terms of their respective cohabitation arrangements.…”

“…In Paugam et al (2021), the main emphasis is interpretive. Several key sentences express interest in developing a better understanding of meaning production and circulation.…”

“…How is interparadigmatic research expressed in the accounting research literature? How can we comprehend the process that underlies the development and publication of interparadigmatic research, focusing on cohabitation involving the positivist and interpretive paradigms of research?Findings -To deal with the first question, the authors focus on two interparadigmatic articles: Greenwood et al (2002) and Paugam et al (2021). The authors find each article showcases a dominant paradigmwhereas the role of the other paradigm is represented as secondary; that is, complementing and enriching the dominant paradigm.…”

“…Findings -To deal with the first question, the authors focus on two interparadigmatic articles: Greenwood et al (2002) and Paugam et al (2021). The authors find each article showcases a dominant paradigmwhereas the role of the other paradigm is represented as secondary; that is, complementing and enriching the dominant paradigm.…”