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Short Sales, Informed Trading, and Merger Announcements

32 Pages Posted: 8 Feb 2010 Last revised: 28 Sep 2011

Benjamin M. Blau

Utah State University - Huntsman School of Business

Kathleen P. Fuller

University of Mississippi - School of Business Administration

Chip Wade

University of Mississippi

Date Written: September 27, 2010

Abstract

Research argues that short sellers are informed investors as current short selling relates inversely with future returns. However, empirical results have yet to determine whether short sellers trade on private information before, say, an upcoming negative new. This paper takes a step in this direction by examining both shorting activity and the information contained in shorting activity around merger announcements. Results in this study do not show evidence of abnormal short selling in acquiring firms’ stocks prior the announcement of mergers. While we show a surge in shorting activity after the announcement, we find that the common negative relation between current shorting activity and future returns is weaker than normal during the post-announcement period. Further, we do not find evidence that the reaction to the announcement by short sellers is driven by factors that drive the post-announcement underperformance in acquiring firms. We are left to conclude that short sellers are neither privately informed nor superior in their ability to process information around merger announcements.

Keywords: Short Selling, Merger and Acquisition, Informed Trading, Merger Characteristics

JEL Classification: G14, G19, G30, G34

Suggested Citation

Blau, Benjamin M. and Fuller, Kathleen P. and Wade, Chip, Short Sales, Informed Trading, and Merger Announcements (September 27, 2010). Available at SSRN: https://ssrn.com/abstract=1549744 or http://dx.doi.org/10.2139/ssrn.1549744

Benjamin M. Blau (Contact Author)

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322
United States

Kathleen Petrie Fuller

University of Mississippi - School of Business Administration ( email )

PO Box 3986
Oxford, MS 38677
United States

Chip Wade

University of Mississippi ( email )

Oxford, MS 38677
United States

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