Imagine you’re hiking through the Yukon and stumble upon a grizzly bear. You can’t fight because you will lose. You can’t run because the bear is faster. What do you do?

“Studies from sociology show that in these situations, we take all the energy that would normally go into fighting or fleeing and we bundle it up into our freeze reflex,” said Brian Connelly, Professor and Luck Eminent Scholar of Management in the Harbert College of Business.

But what does this have to do with business? Freezing under fire is called threat rigidity theory and it’s precisely what most managers do when faced with short-selling investors. Connelly co-authored “Hostile Principals: Managerial Response to Short Sellers,” which is a working paper under review at the Academy of Management Journal, and examines courses of action managers should explore when short-selling investors temporarily own shares of their firms.

“Top managers cannot fight or flee from short sellers because they are powerful investors and the company’s stock is available on the open market if they are public,” explained Connelly, who presented his paper at three universities in England Feb. 12-17, including the University of Cambridge. “Faced with the threat of short sellers, managers often freeze. In other words – they stop doing all of the things they were doing to grow the company and make it profitable.

“They are acting much like we would if we encountered a bear in the woods.”

Short sellers temporarily own shares of the firm, but must return the shares at a set price. As the paper reads, “Their value is maximized when firm value is minimized.”

Connelly said many short-sellers begin smear campaigns. “They go public telling everybody and their brother how bad the company is, how stupid the managers are, how misguided the strategic plan is, and how horrible their products are because they want the stock price to go down,” he said. “This is why they are a threat to managers.”

But Connelly’s paper suggests that managers recoil, fire back and fight the big, bad grizzly bears. He recommends that managers:

• Be publicly active and defend themselves against smear campaigns brought on by short sellers – counteract what they have been saying with a positive message.
• Buy company stock. Such a move communicates to investors that they believe in the direction of the company.
• Enlist the help of other powerful shareholders to go public in defense of the company – counteracting short sellers’ strategies.
• Communicate with securities analysts. “Investors do not know whether to believe the message coming at them from short sellers or from managers, so they look to analysts to break the tie,” Connelly explained. “If managers can get analysts in their corner, other investors may be likely to ignore the warning cries of short sellers.”

But Connelly doesn’t necessarily believe that short-selling is always a bad thing.

“In the positive column, short-sellers serve an important purpose because they discipline managers for poor performance and uncover instances of fraudulent behavior,” Connelly said. “It’s pretty common that short-sellers will attack a company and soon thereafter it becomes public knowledge that the company was engaging in nefarious behavior.

“In the negative column, short-sellers can hinder managers from engaging in the kinds of activities that allow them to turn the company around. Managers become so focused on the demands of the short-term that they are unable to focus on the long-term competitive strategies.”

Other than Cambridge, Connelly had the opportunity to speak at Imperial College London and the City University of London – where he studied as an undergraduate in the late 1980s and now returns as an eminent scholar. The trip allowed Connelly to present his research to business and economics faculty, conduct doctoral workshops, and meet privately with junior faculty members to discuss their research projects.

“It was a truly special opportunity to lecture at the University of Cambridge,” Connelly said. “It was founded in 1209 and its alumni include Sir Isaac Newton, Charles Darwin, and Stephen Hawking, among others. These kinds of opportunities are a boon for the Harbert College of Business because they increase our visibility and help us build our international reputation. When they see research like this coming out of the Harbert College of Business, it impresses on them that we are a great university, generating knowledge that is changing the way businesses are run.”