Low-cost funds and brokers make money lending out shares held by their clients. Thus, shorting is an inherent part of these business models. They enable shorts and collect rent on shares.
Imagine collecting a few percent on the $10B in Tesla shares held short. This is a small industry.
The question for Musk is how to disrupt the shorting industry. Taking Tesla private is one strategy for shutting down the Short Tesla Industry. But I would suggest another way.
Tesla needs to define a forward-looking dividend policy. It should be clear in investor's minds what the future of Tesla dividends will look like even if Tesla is not currently prepared to pay any dividend.
Essentially a dividend forces shorts to pay rent to Tesla shareholders. This cuts into the rent that funds and brokers seek to obtain from shorts. A dividend policy changes the equilibrium that the shorting industry feeds industry. Dividends can reduce the total number of shares shorted. A policy outlining future dividends will start to challenge the sustainability of long-term shorting, even before those dividends are paid out. So this is something that Tesla can pursue now.
I have a few ideas about how construct a dividend policy, but I want to stop here so we can all digest the basic concept:
Dividends force shorts to pay rent to shareholders and changes the equilibrium feeding the shorting industry.
Imagine collecting a few percent on the $10B in Tesla shares held short. This is a small industry.
The question for Musk is how to disrupt the shorting industry. Taking Tesla private is one strategy for shutting down the Short Tesla Industry. But I would suggest another way.
Tesla needs to define a forward-looking dividend policy. It should be clear in investor's minds what the future of Tesla dividends will look like even if Tesla is not currently prepared to pay any dividend.
Essentially a dividend forces shorts to pay rent to Tesla shareholders. This cuts into the rent that funds and brokers seek to obtain from shorts. A dividend policy changes the equilibrium that the shorting industry feeds industry. Dividends can reduce the total number of shares shorted. A policy outlining future dividends will start to challenge the sustainability of long-term shorting, even before those dividends are paid out. So this is something that Tesla can pursue now.
I have a few ideas about how construct a dividend policy, but I want to stop here so we can all digest the basic concept:
Dividends force shorts to pay rent to shareholders and changes the equilibrium feeding the shorting industry.