This is a excellent point, I agree. You’re absolutely right that they could argue that and that reputational risks should be considered before such a strategy is adopted. And even though it is perfectly legal to lobby for your own positions / stock, lobbying for shorts is usually more morally laden in the eyes of the public (there is in fact evidence that people react very strongly to this).
However, I think if someone were to mount the criticism of having ulterior motives, then there is a counterargument to show that this criticism is ultimately misguided:
If the market is efficient, then the valuation of an industry will have risks that could be created easily through lobbying priced in. In other words, if the high valuation of Big Tobacco were dependent on someone not doing a relatively cheap lobbying campaign for tobacco taxes, then shorting it would make sense for socially neutral investors with no altruistic motives—and thus is should already be done.
Thus, this strategy would only work for truly altruistic agent who will ultimately lose money in the process, but only get a discount on their philanthropic investment. In other words, the investment in the lobbying should likely be higher than the profit from the short. And so, it would be invalid to say that someone using this strategy would have ulterior motives. But yes again, I take your point that this subtle point might get lost and it will end up being a PR disaster.
I don’t buy your counterargument exactly. The market is broadly efficient with respect to public information. If you have private information (e.g. that you plan to mount a lobbying campaign in the near future; or private information about your own effectiveness at lobbying) then you have a material advantage, so I think it’s possible to make money this way. (Trading based on private information is sometimes illegal, but sometimes not, depending on what the information is and why you have it, and which jurisdiction you’re in. Trading based on a belief that a particular industry is stronger / weaker than the market perceives it to be is surely fine; that’s basically what active investors do, right?)
(Some people believe the market is efficient even with respect to private information. I don’t understand those people.)
However, I have my own counterargument, which is that the “conflict of interest” claim seems just kind of confused in the first place. If you hear someone criticizing a company, and you know that they have shorted the company, should that make you believe the criticism more or less? Taking the short position as some kind of fixed background information, it clearly skews incentives. But the short position isn’t just a fixed fact of life: it is itself evidence about the critic’s true beliefs. The critic chose to short and criticize this company and not another one. I claim the short position is a sign that they do truly believe the company is bad. (Or at least that it can be made to look bad, but it’s easiest to make a company look bad if it actually is.) In the case where the critic does not have a short position, it’s almost tempting to ask why not, and wonder whether it’s evidence they secretly don’t believe what they’re saying.
All that said, I agree that none of this matters from a PR point of view. The public perception (as I perceive it) is that to short a company is to vandalize it, basically, and probably approximately all short-selling is suspicious / unethical.
Agreed, but I don’t think there’s a big market inefficiency here with risk-adjusted above market rate returns. Of course, if you do research to create private information then there should be a return to that research.
Trading based on private information is sometimes illegal, but sometimes not, depending on what the information is and why you have it, and which jurisdiction you’re in. [...[
This is a excellent point, I agree. You’re absolutely right that they could argue that and that reputational risks should be considered before such a strategy is adopted. And even though it is perfectly legal to lobby for your own positions / stock, lobbying for shorts is usually more morally laden in the eyes of the public (there is in fact evidence that people react very strongly to this).
However, I think if someone were to mount the criticism of having ulterior motives, then there is a counterargument to show that this criticism is ultimately misguided:
If the market is efficient, then the valuation of an industry will have risks that could be created easily through lobbying priced in. In other words, if the high valuation of Big Tobacco were dependent on someone not doing a relatively cheap lobbying campaign for tobacco taxes, then shorting it would make sense for socially neutral investors with no altruistic motives—and thus is should already be done.
Thus, this strategy would only work for truly altruistic agent who will ultimately lose money in the process, but only get a discount on their philanthropic investment. In other words, the investment in the lobbying should likely be higher than the profit from the short. And so, it would be invalid to say that someone using this strategy would have ulterior motives. But yes again, I take your point that this subtle point might get lost and it will end up being a PR disaster.
I don’t buy your counterargument exactly. The market is broadly efficient with respect to public information. If you have private information (e.g. that you plan to mount a lobbying campaign in the near future; or private information about your own effectiveness at lobbying) then you have a material advantage, so I think it’s possible to make money this way. (Trading based on private information is sometimes illegal, but sometimes not, depending on what the information is and why you have it, and which jurisdiction you’re in. Trading based on a belief that a particular industry is stronger / weaker than the market perceives it to be is surely fine; that’s basically what active investors do, right?)
(Some people believe the market is efficient even with respect to private information. I don’t understand those people.)
However, I have my own counterargument, which is that the “conflict of interest” claim seems just kind of confused in the first place. If you hear someone criticizing a company, and you know that they have shorted the company, should that make you believe the criticism more or less? Taking the short position as some kind of fixed background information, it clearly skews incentives. But the short position isn’t just a fixed fact of life: it is itself evidence about the critic’s true beliefs. The critic chose to short and criticize this company and not another one. I claim the short position is a sign that they do truly believe the company is bad. (Or at least that it can be made to look bad, but it’s easiest to make a company look bad if it actually is.) In the case where the critic does not have a short position, it’s almost tempting to ask why not, and wonder whether it’s evidence they secretly don’t believe what they’re saying.
All that said, I agree that none of this matters from a PR point of view. The public perception (as I perceive it) is that to short a company is to vandalize it, basically, and probably approximately all short-selling is suspicious / unethical.
Agreed, but I don’t think there’s a big market inefficiency here with risk-adjusted above market rate returns. Of course, if you do research to create private information then there should be a return to that research.
True, but I’ve heard that in the US, normally, if I lobby in the U.S. for an outcome and I short the stock about which I am lobbying, I have not violated any law unless I am a fiduciary or agent of the company in question. Also see https://www.forbes.com/sites/realspin/2014/04/24/its-perfectly-fine-for-herbalife-short-sellers-to-lobby-the-government/#95b274610256
I really like this, but...
This seems to be why people have a knee jerk reaction against it.