Yes, and if everyone was perfectly rational, the market would be completely efficient and we would live in a utopia. In the real world, sudden price drops in small companies trigger panic-selling. Investors often move with the herd-- they don't have time to do all the research into a company's fundamentals and make an independent evaluation of a stocks worth. When there is a sudden price drop, all the think is "damn, better cut my losses now, because all these other guys now something is wrong with this company."

There should be regulation to make it exceedingly difficult to trigger panics by naked short-selling. Regular short-selling isn't so bad.