Navigating the Classificatory Void: Why Activist Short Sellers Tell Messy Stories

• In Event: 50404 - Risk and Uncertainty in the New Economy, from Labor to Finance

Abstract

Narratives shape market prices by helping investors interpret new information. Yet those who most depend on rapid revaluation - activist short sellers - often publish sprawling, rhetorically flamboyant reports grounded in uneven evidence. Drawing on qualitative coding and machine-learning analysis of 708 U.S. short-selling campaigns (2008–2023), financial market data, media coverage, and semi-structured interviews, we explain this counter-intuitive rhetoric. We show that short sellers confront not only a cognitive task (making evidence legible) but also a coordination task that varies with evaluative uncertainty - the absence of shared standards for valuation. High uncertainty forces narrators to facilitate second-order inference: investors must guess how others will react. Short sellers meet this challenge through what we call narrative arbitrage - strategically using narrative complexity to bridge divergent evaluative frames. They craft either (a) modular sets of stories or (b) a single moral indictment reinforced from multiple angles; under low uncertainty they rely on concise conventional or reclassification tales. By linking narrative form to audience coordination, the paper extends theories of classification, narrative persuasion, and valuation in markets.

Authors

• Georg Rilinger, MIT Sloan School of Management

• Brad R. Turner, Massachusetts Institute of Technology