Keeping short sellers at bay through CPA: The deterring role of a firm’s lobbying activity.

Abstract

Responding to recent calls in the strategic management literature to examine firm strategies that influence short sellers’ decision to target firms, this study uses precepts from signaling theory to argue that lobbying activity of a firm – a critical form of non-market strategy that is part of corporate political activity (CPA) – acts as a signal that deters short sellers from targeting a focal firm. We also investigate the moderating roles of three factors – lobbying scope, industry regulation, and regulatory risk – that make lobbying firms more (or less) attractive as potential targets for short sellers. In a longitudinal sample of S&P 1500 firms from 2008 to 2018 and using supplementary interviews with short sellers, we find broad empirical support for our theoretical framework. Our study extends current CPA literature by investigating a more proximal but indirect benefit of lobbying and research on capital market investors by emphasizing the role of short capital market investors.