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

49 Pages Posted: 17 Mar 2011 Last revised: 10 Jul 2016

Melissa Porras Prado

Nova School of Business and Economics

Pedro A. C. Saffi

University of Cambridge - Judge Business School

Jason Sturgess

Queen Mary University of London

Date Written: July 10, 2016

Abstract

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.

Keywords: Limits to Arbitrage, Equity Lending Markets, Short Selling, Ownership Structure, Arbitrage Risk

JEL Classification: G10, G12, G14

Suggested Citation

Prado, Melissa Porras and Saffi, Pedro A. C. and Sturgess, Jason, Ownership Structure , Limits to Arbitrage and Stock Returns: Evidence from Equity Lending Markets (July 10, 2016). Available at SSRN: https://ssrn.com/abstract=1787291 or http://dx.doi.org/10.2139/ssrn.1787291

Melissa Porras Prado

Nova School of Business and Economics ( email )

Campus de Campolide
Lisbon, 1099-032
Portugal

Pedro A. C. Saffi

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

HOME PAGE: http://www.pedrosaffi.com

Jason Sturgess (Contact Author)

Queen Mary University of London ( email )

Mile End Rd
London, E1 4NS
United Kingdom

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