http://www.fool.com/investing/high-growth/2005/03/24/the-naked-truth-on-illegal-shorting.aspx
I would be very interested in your comments about this article on naked shorts.
The impact on the finances of companies being shorted is not discussed. Understandably so, since a company is either solvent (assets >= liabilities) or insolvent (assets < liabilities). Its stock price has nothing to do with it. In fact, if short-sellers drive the stock price low enough, the company might find that it makes sense to buy back its own stock. Other companies might see this as an opportunity for a takeover. Why was it that no corporation wanted to buy Bear Stearns, Lehman or AIG? Because they were insolvent - you could sell off all the assets without being able to pay off all their debts. They were basically a money pit.
Budweiser had no problem selling itself off to Inbev - in fact it had to fight its suitor off before succumbing to a better offer. Sandisk has had no problem trying to get acquired - it never even asked and Samsung came calling. Short sellers don't sell good companies - they sell bad companies, hopefully at the high, before anyone else figures out they're bad companies. But good or bad, a company's solvency isn't affected by its stock price, any more than your solvency can be affected by your neighbors' opinion of you.
Here’s another thought. Lehman had huge stock option programs for its senior executives. In the past four years, Lehman bought back $6.5b in stock in order to pump up the value of their stock options. If Lehman had that $6.5b last week, would it have folded? I don’t know. But having kept that cash would have increased Lehman’s shareholder capital by almost 1/3. Should companies with lavish executive stock option programs be allowed to buy back stock? Now that’s a question that’s worth pondering, because it directly affects the solvency of the companies that do the buybacks.