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Journal of Financial and Quantitative Analysis Vol. 58 No. 5 2023

The Market for Corporate Control as a Limit to Short Arbitrage

Costanza Meneghetti1,2,3,4,5; Ryan Williams1,2,3,4,5; Steven Chong Xiao1,6,2,3,4,5

1 University of Denver · 2 Chinese University of Hong Kong · 3 Université Paris Dauphine-PSL · 4 University of Hong Kong · 5 Colorado State University · 6 The University of Texas at Dallas

open access

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 the 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.

DOI
10.1017/s0022109022001302
Volume
58
Issue
5
Pages
2162-2189
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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