The model provides a natural explanation of the recent stock price swings of GME and AMC (shown in Figure 1). However, the model does require that the coalition can buy additional shares, which became impossible at a number of brokerages at the peak of the short-squeeze turmoil in the case of GME and AMC. 9 Importantly, the model does not require the coalition to invest in a bubble or be irrational. A key result of the model is that a pessimistic outcome cannot be sustained if investors anticipate a "short squeeze" - that is, an aggressive bidding up of the stock price by the coalition of buyers. By doing so, the coalition can effectively push the company into the optimistic outcome. Provided that the coalition has sufficient buying power, it can bid up the value of the company's securities, thereby allowing the company to raise money by issuing additional shares. We show that when the pessimistic case is initially expected, there is an arbitrage opportunity - that is, an ability to make riskless profit - for a coalition of investors. In the pessimistic scenario, the company is forced to cease operations. 8 In the model's optimistic scenario, the company is able to finance productive investments that increase the company's fundamental and market values. In the model, both pessimistic and optimistic outcomes are mathematically possible, and only investor expectations determine which outcome will occur. 7 We built a model of a company that is fundamentally solvent but illiquid in the sense that it needs access to financial markets to continue operating. Our research sheds light on the stock price dynamics of GME and AMC. Of course, it is difficult to say how well GME and AMC will fare in the future, but they are much stronger financially and better positioned to take advantage of demand increases if they occur. 6īy buying GME and AMC stock aggressively, the WSB coalition reaped massive rewards and fundamentally improved the companies' prospects. 4 The company may use those proceeds to pay off some of its $485 million in debt, 5 and GME had said previously it was considering issuing stock to fund its new focus on e-commerce. As for GME, it announced a 3.5 million share stock offering on April 5 worth approximately $670 million at April 5 prices.
Notably, its share price went up when it announced this plan, indicating that buyers, sellers and holders of the stock believed on average that it was worth diluting the existing shares to recapitalize the company. 28, AMC issued 44.4 million shares and paid off $600 million in debt. 3 The story was similar for AMC.įor both AMC and GME, the emergence of optimistic scenarios turned out to have very real effects on the companies' fundamentals. This giant leap in GME's price increased the mark-to-market value of outstanding shares by $20 billion and cost hedge funds (who were shorting the stock) $12.5 billion, according to one report.
For example, a $10,000 investment in GME shares on Jan. By buying large quantities of the companies' stock, the WSB coalition drastically bid up the share prices. In dramatic fashion, the now famous (or infamous) Reddit WallStreetBets (WSB coalition) appears to have tipped the balance in favor of the optimistic scenarios for GME and AMC. 2 As for the movie-theater chain AMC, it had been profitable before the pandemic and could conceivably be so afterward, provided it could continue servicing its debts. Michael Burry (the investor portrayed in The Big Short movie) argued that GME, a retailer of video games and consoles, was given an extension for its current business model when manufacturers revealed that next-gen video consoles would continue to include physical media. 1īut there were also optimistic cases to be made for GME and AMC. Many hedge funds acted on this pessimistic view by "short selling" the companies' stocks.
#Amc stock short squeeze movie#
The pessimistic cases for GME and AMC were obvious: Reduced traffic at malls and movie theaters, respectively, decimated their revenues, and the persistence of these tough operating conditions could have saddled the companies, which were heavily indebted, with even larger debt burdens, possibly resulting in bankruptcy.
These divergent possibilities were demonstrated by the recent market swings of GameStop (GME) and AMC Entertainment (AMC). Alternatively, the company may benefit from a virtuous cycle in which optimistic expectations permit it to raise additional funds and thereby allow it to survive and even prosper.
It is possible for the company to fall prey to a vicious cycle in which pessimistic expectations bar it from raising additional funds and thereby force it into bankruptcy. A cash-strapped company's survival can depend on the self-fulfilling beliefs of investors.
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