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

Pedro A. C. Saffi

University of Cambridge

Jason Sturgess

DePaul University

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

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Date posted: November 21, 2009 ; Last revised: October 20, 2012

Suggested Citation

Saffi, Pedro A. C. and Sturgess, Jason, Ownership Structure, Limits to Arbitrage and Stock Returns: Evidence from Equity Lending Markets (March 15, 2012). IESE Business School Working Paper No. 836. Available at SSRN: http://ssrn.com/abstract=1509650 or http://dx.doi.org/10.2139/ssrn.1509650

Contact Information

Pedro A. C. Saffi (Contact Author)
University of Cambridge ( email )
Trumpington Street
Cambridge, CB2 1AG
United Kingdom
HOME PAGE: http://www.pedrosaffi.com
Jason Sturgess
DePaul University ( email )
1 East Jackson Blvd.
Chicago, IL 60604
United States
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