It is not. Whatever side bets people may have with each other may result in money changing hands, but it's not the "original dividend".
There are still 1000 shares, 1000 votes, 1000 dividends paid, 1000 dividends collected, 1000 ownership claims on residual assets. The bookkeeping can be confusing, but there's no shares being generated.
> for questions of exposure to price fluctuations and that sort of thing, it's effectively creating a share.
If you and I agree that if Apple goes up at least 10% by this time next week, I'll pay you $500, otherwise you'll pay me $300, then we both now have exposure to price fluctuations. How many shares, exactly, do you think we've created? I'd love to see your math. :)
Just because you have exposure to X doesn't mean you own X, and it certainly doesn't mean you've created X out of thin air.
In your case, we've jointly made a wager. I wouldn't be an investor in Apple, like I would be if I held shares, and would still be, if my shares were lent out.
You missed out the last part of that, which is "and investors pay 1 dividend". Investors as a class receive 1000 dividends on net. It all just nets out.
> If the company goes bust, all 1001 shares have lost their value.
And the person who sold a borrowed share will have gained money. The net change across the economy is the value of 1000 shares, not 1001 shares.
> If there's a shareholder lawsuit with a payout, there will be 1001 claims
This usually doesn't happen, but when it does, it's a paperwork error, and an artifact of the fairly archaic way share ownership is recorded in the US. It's not inherent to the system, and it doesn't tell you anything about how short selling works in principle.
Selling short requires borrowing shares. It's the same way that banks create money. There were 1000 shares, then 200 more were borrowed and resold. The buyer of the 200 shares have shares, so in practice does the original lender who is owed a share by the short seller. The IOU isn't technically a share but for most practical purposes it is. If you want to sell it, it's worth a share. If the share price goes up or down, so does the IOU price. If the share price gains $1, the owner and the lender make $1 each. If it falls $1, they each lose $1.
> Firm A doesn't own them anymore - that's why you have to pay out company dividends to firm A from your own pocket while you're borrowing them.
Right, which is why it acts like another share again -- the original dividend is paid to the person the short seller sold the share to but the lender still gets it too. There are de facto two dividends because there are de facto two shares.
There are actual differences of course (e.g. IOUs can't vote), but for questions of exposure to price fluctuations and that sort of thing, it's effectively creating a new share.