The Market for Corporate Control as a Limit to Short Arbitrage
Meneghetti, C.; Williams, Ryan; Xiao, S. C. (2022), The Market for Corporate Control as a Limit to Short Arbitrage, Journal of Financial and Quantitative Analysis, p. 1-28. 10.1017/S0022109022001302
TypeArticle accepté pour publication ou publié
Journal nameJournal of Financial and Quantitative Analysis
Cambridge University Press
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Abstract (EN)We hypothesize that corporate takeover markets create significant constraints for short sellers. Both short sellers and corporate bidders often target firms with declining economic prospects. Yet, a target firm’s stock price generally increases upon a takeover announcement, resulting in losses for short sellers. Therefore, short sellers should require higher rates of return when takeover likelihood is higher. Consistent with this prediction, the return predictability of monthly short interest increases with industry-level takeover probability and decreases as takeover defenses are implemented. Our results suggest that efficient takeover markets create trading frictions for short sellers and can therefore inhibit overall market efficiency.
Subjects / KeywordsMarket for Corporate Control; Short Selling; Limit to Arbitrage
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