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Dow Drama

Dow Chemical’s 1-in-1000 Stock Action Works in Warren Buffett’s Favor

A Yale professor says Dow Chemical shares show ‘pretty clear evidence of manipulation’


Dow Chemical shares are showing clear signs of tinkering, according to an analysis by a Yale University professor.

The shares come within cents of an important threshold–$53.72–pretty often. But they’ve closed above that level so rarely that there’s less than a one-in-a-thousand chance that it’s happening randomly, according to the analysis.

If the stock closes above $53.72 enough times, Dow has the option to buy back $3 billion worth of preferred shares from Warren Buffett’s Berkshire Hathaway. But as the Journal noted in a front-page story last week, people familiar with the matter say that executives at Dow believe someone is selling its stock short — or betting that its price will fall — to keep it from rising above $53.72.

In his analysis, Yair Listokin, who teaches contracts at Yale Law School and is a trained economist, picked 48-cent ranges for the daily closing price of Dow stock from April 1, 2014 to Monday. He plotted every 48-cent increment of the share price during this period against the number of times the shares have closed in that range.

For instance, the shares have closed just below $53.72 more than 50 times. They’ve closed in the $52.71 to $53.71 window 91 times. The number of times they’ve closed in the window just above $53.72? Seven times.

This week, the shares closed at $54.13 on Monday and $53.99 on Tuesday after the Journal story was published.

[RELATED: Warren Buffett Could Lose an $8-Per-Second Windfall on His Dow Chemical Stock]

Mr. Listokin’s histogram shows the dramatic dropoff. Even accounting for different methods, Mr. Listokin said the chance of this being a random occurrence is remote.

Photo: Yair Listokin

“The probability that this would happen by chance is essentially zero,” he said, noting that his findings offer “pretty clear evidence of manipulation.”

Mr. Listokin said he’s working on a more detailed paper and plans to make the Dow action part of his class discussion.

Who would benefit from Dow’s share price being below $53.72? Berkshire comes to mind, since it gets a $255 million annual dividend from Dow for helping finance its 2009 takeover of Rohm & Haas. Kuwait’s sovereign wealth fund also helped fund the deal and owns $1 billion of Dow preferred securities.

When asked, Mr. Buffett declined to comment last week on whether he or his deputies at Berkshire were shorting Dow to exert downward pressure on the stock price. Under the original agreement, Berkshire was forbidden from engaging in short-selling or hedging its preferred stake in Dow until April 2014. The clause ensured that Berkshire was locked into its investment in Dow and couldn’t reduce “the economic consequence” of ownership through a hedge.