Jayanth Varma has long emphasised the importance of the short seller in upholding market efficiency. He points to many episodes where speculators have ferreted out misdeeds of firms, taken up short positions, and then brought the bad news to light in order to profit from it. Short selling, then, generates incentives for external parties to place constraints upon firms who are falsifying information and obtaining an exaggerated valuation.
- There is a trader named Mark Cuban. He funds Chris Carey, who runs the website.
- Carey discovers firms doing bad things.
- First, Mark Cuban gets an opportunity to short sell the stock.
- Then, Carey goes public with the facts that he has unearthed.
- If Carey is right, the stock prices drops in response to his revelations, and Cuban makes money.
We need a few of these in India. At present, there is too much of a long-only bias in the media. The media has always had to worry about making advertisers unhappy. In addition, an extremely unhappy development in recent years has been the systematic equity investments in certain firms by one massive media house, which then goes on to shamelessly trumpet the virtues of these firms.