Choi and Spier on "Taking a Financial Position in Your Opponent in Litigation"

Should a plaintiff suing a public corporation be allowed to take a short position in the company's stock? Choi and Spier explore that issue in an interesting analysis:

With a long position, the plaintiff would benefit if the defendant’s stock price goes up, and with a short position the plaintiff would benefit if the defendant’s stock price falls.  By selling the stock short, the plaintiff is actively betting against the firm, and will reap higher financial gains when the defendant suffers greater litigation losses.  If the capital market is unaware of the lawsuit at the time that the plaintiff takes the short position, then the plaintiff can of course profit from the financial investment.   If the capital market is aware of the lawsuit and has rational expectations, , the plaintiff does not capture any systematic, direct benefit from the financial position.  However, the plaintiff can secure indirect strategic benefits because, by the time of settlement or trial, the initial expenditure the plaintiff has incurred in taking the financial position is sunk and the plaintiff has an interim incentive to maximize the aggregate return from both litigation and the financial position.

Somewhat counter-intuitively (at least counter to my intuition), they conclude that "the plaintiff’s optimal short position can actually benefit the defendant and lower the rate of litigation."

You'll need to go read the whole thing.