Sharesleuth: Mark Cuban’s Stock
Market Experiment

While some media may inadvertently affect the way stock prices rise and fall, Mark Cuban, billionaire owner of the Dallas Mavericks, has launched a new Web site that hopes to influence its readers’ investing decisions.

Sharesleuth.com is an investment blog written by a journalist hired by Cuban to investigate and expose securities fraud and corporate wrongdoing. Cuban thinks Sharesleuth is a good idea because “many investment opportunities are not what they seem,” and it’s impossible for the average investor or the mainstream press to validate claims made by the thousands of publicly traded companies.

Sharesleuth’s inaugural story in July 2006 exposed Xethanol Corp. for lacking evidence supporting an assertion regarding its ethanol production abilities. This article elicited a press release from the alternative-fuel manufacturer defending its practices and may have been the cause of Xethanol’s recent CEO turnover.

“Xethanol dropped significantly on the day of the report,” says Sandy Leeds, senior finance lecturer at McCombs. “The volume was slightly higher that day and significantly higher later that week.”

Was Sharesleuth to blame? Leeds says, “If you look at the dollar value of the trades, they are small—approximately $10 million of stock trading hands in one day. As a result, it’s hard to attribute this to Sharesleuth.com. It could just easily be a hedge fund shorting the stock based on their own research.”

Some investors and analysts receive more attention than others, giving them a better chance of impacting the market, Leeds says. Those skilled at self-promotion like Cuban fit into this category. Xethanol’s market capitalization is small—less than $200 million—thus enhancing Sharesleuth’s ability to move its stock.

A twist to the tale is that Cuban himself plans to make investments based on the information uncovered by Sharesleuth’s investigative reporter, Christopher Carey, before the information is posted on the Web site. He plans to invest in the stock of the company being investigated prior to releasing the negative information about it, and in turn, profit from selling short once the public is privy to the company’s actions. Cuban’s investments will also be made public.

“To the extent that Sharesleuth.com develops a reputation for detailed research, there is certainly potential to impact the market,” Leeds says. But he cautions that investors shouldn’t take action after Cuban has already entered into large short positions. It’s possible that he has already moved the market.

McCombs Assistant Professor of Finance Paul Tetlock says that because investors crave the kind of in-depth reporting that Web sites such as Sharesleuth offer, they have the potential to affect the stock market.

“Investors value thorough and timely information that is not already reflected in stock prices because this leads to trading opportunities,” Tetlock says. “If Sharesleuth is able to uncover this kind of information, they will not only make their readers rich, but they will also indirectly make stock market prices more efficient.”