Ownership Structure, Limits to Arbitrage and Stock Returns: Evidence from Equity Lending Markets
Pedro A. C. Saffi
University of Cambridge - Judge Business School
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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