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if investors over-react (e.g. in the context of
a general lack of confidence in some financial services stocks), the price decline may be
excessive. Such volatility reduces the ability of a firm to raise equity capital or to borrow
money and makes it harder for banks to attract deposits. In exceptional circumstances,
prophecies of financial difficulties may even become self-fulfilling.

... the vulnerability of certain financial sector
companies can sustain an atmosphere of fear which is conducive to the use of short
selling strategies, possibly in concert with others, to distort and drive down share
prices. Potential buyers may lack sufficient confidence to match the increased supply
at or near prevailing market prices and so share prices can plummet, further fuelling
fears in the particular sectors/institutions being shorted and/or on a systemic level.
Banks targeted in this way might ultimately experience a depositor ‘run’. Through
this process, a short selling strategy may become a rapid self-fulfilling prophecy
resulting in the collapse of those targeted by the short sellers and potentially
contagion of related stocks.

Such a shorting strategy might be viewed as rational on the part of the short sellers as
it can reap substantial profits. However, the contagion effect can ultimately result in
disorderly markets, not only in the shares of a particular issuer but more generally.