The Market for Corporate Control as a Limit to Short Arbitrage

C. Meneghetti, Ryan Williams and S. C. Xiao
Additional contact information
C. Meneghetti: CSU - Colorado State University [Fort Collins]
Ryan Williams: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique
S. C. Xiao: UT Dallas - University of Texas at Dallas [Richardson]

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Abstract: 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.

Keywords: Market for Corporate Control; Short Selling; Limit to Arbitrage (search for similar items in EconPapers)
Date: 2022
New Economics Papers: this item is included in nep-cfn
Note: View the original document on HAL open archive server: https://hal.science/hal-04211499v1
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Published in Journal of Financial and Quantitative Analysis, 2022, 58 (5), pp.2162-2189. ⟨10.1017/S0022109022001302⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-04211499

DOI: 10.1017/S0022109022001302

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