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Ownership Structure, Limits to Arbitrage, and Stock Returns: Evidence from Equity Lending Markets

Melissa Porras Prado; Pedro A. C. Saffi1; Jason Sturgess2

1 University of Cambridge · 2 DePaul University

Review of Financial Studies 2016 open access

We examine how institutional ownership structure gives rise to limits to arbitrage through its impact on short-sale constraints. Stocks with lower, more concentrated, short-term, and less passive ownership exhibit lower lending supply, higher costs of shorting, and higher arbitrage risk. These constraints limit the ability of arbitrageurs to take short positions and delay the correction of mispricing. Stocks with more concentrated ownership exhibit smaller announcement day reactions, larger post-earnings announcement drift, and an additional negative abnormal return of -0.47% in the week following a positive shorting demand shock. Received June 16, 2014; accepted June 8, 2016 by Editor Laura Starks.

DOI
10.1093/rfs/hhw058
Volume
29 (12)
Pages
3211-3244
Language
en
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