Contributions of short selling : A qualitative study of short selling on the Swedish stock market

Sammanfattning: Since the subprime crises numerous articles examining short selling have been published, most of them present positive contributions of short selling to financial markets. Short selling, however, is continually a subject for criticism and mistrust. The critique presented by legislators, media and bankers are hard to back up with sufficient evidence according to the researchers in the field. There are assumptions that short selling contribute to increase financial crisis, short selling is also a subject to ethical questioning. The research question of this thesis is “how does short selling affect the Swedish stock market?” with the purpose to examine the positive and negative contributions of short selling, to generate an understanding to why it exist different perspectives regarding short selling.This is a bachelor thesis written by two students at Umeå School of Business and Economics. The epistemological view of this thesis is interpretivism and the ontological standpoint is constructionism. By having this view the authors have drawn their conclusions based on existing studies. By identifying a set of factors that are needed to create an understanding about the negative and positive contributions of short selling, a theoretical framework was gathered and analyzed. After the analysis the authors conducted five in-depth interviews to get the views from respondents with a close connection to short selling. Analyzing the respondent’s answers with the theoretical framework the authors developed an understanding covering positive and negative contributions of short selling.The conclusions made in this paper are that short selling overall is positive for financial market by arguing reductio ad absurdum. The author’s conclusion is that short sales strengthen the Swedish financial market in the long run by increasing market efficiency, liquidity and stability. Hence the critique against short selling are in most cases unjustified and based on lack of knowledge. Furthermore the authors of this thesis, based on the conducted interviews, argue that the conclusion can be a foundation for authorities in Sweden for future legislations. The conclusion is that the legislations overall is useful since they aim to prevent market abuse and gives security to the financial market. However, the authors have found indications showing that the disclosure requirement today is misallocating resources. Therefore the authors recommend that the Swedish Financial Supervisory Authority should investigate how much the disclosure actually is contributing to the market efficiency in Sweden. Furthermore, the authorities should develop a solution solving the problems regarding market abuse without restricting short selling.