Ownership Structure, Limits to Arbitrage and Stock Returns: Evidence from Equity Lending Markets
Pedro A. C. Saffi
University of Cambridge
March 15, 2012
IESE Business School Working Paper No. 836
We examine how institutional ownership structure gives rise to limits to arbitrage through its impact on short-sale constraints. Stocks with lower or more concentrated institutional ownership exhibit greater borrowing costs, higher recall risk and increased levels of arbitrage risk. The tighter short-sale constraints raise the cost - and required return - for arbitrageurs to take short positions in a stock. We show that an increase in shorting demand for stocks in the top quintile of ownership concentration is associated with negative abnormal returns of 0.77% in the following week relative to stocks in the lowest quintile.
Number of Pages in PDF File: 45
Keywords: Limits to arbitrage, short sales, ownership structure, arbitrage risk, equity lending.
JEL Classification: G10, G11, G14, G18, G28, G32
Date posted: November 21, 2009 ; Last revised: October 20, 2012
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