Short Selling and Price Pressure Around Merger Announcements

Benjamin Blau (), Kathleen Fuller () and Chip Wade ()

Journal of Financial Services Research, 2015, vol. 48, issue 2, 143-160

Abstract: Prior research argues that short selling by merger arbitrageurs adds downward pressure to the stock prices of acquiring firms, particularly for firms that use stock financing. We test this hypothesis by examining daily short sale data surrounding merger announcements. Our initial results show that short selling activity surges in response to merger announcements and that abnormal post-announcement short selling is driven by those mergers that use stock financing. This result is consistent, in part, with the presence of merger arbitrage. However, additional tests show that the negative post-announcement stock returns to acquiring firms are orthogonal to the level of post-announcement short selling activity. These findings extend the current literature by showing that, while post-announcement short selling is abnormally high, this short selling does not put undue pressure on acquiring firms’ stock prices. Copyright Springer Science+Business Media New York 2015

Keywords: Short Selling; Merger and acquisition; Informed trading; Merger characteristics; Merger arbitrage; G14; G19; G30 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (2)

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DOI: 10.1007/s10693-014-0197-3

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