Merger Arbitrage Short Selling and Price Pressure
42 Pages Posted: 9 Mar 2013 Last revised: 24 May 2021
Date Written: March 1, 2014
We evaluate the over-valuation hypothesis and merger arbitrage price pressure hypothesis as potential explanations for the observed negative returns to stock acquirers around merger announcement. Using daily shorting flow data, we show that the majority of the negative announcement returns can be attributed to price pressure induced by merger arbitrage short selling. Additional analysis of shorting activity and associated returns for floating-exchange-ratio stock acquirers, at deal closings and among withdrawn stock deals further supports merger arbitrage price pressure explanation. We also find merger arbitrage activity increases with estimated arbitrage spread on a daily basis. As a whole, the results suggest that merger arbitrageurs play a critical role in stock mergers.
Keywords: Merger arbitrage, short selling, mergers and acquisitions
JEL Classification: G14, G34
Suggested Citation: Suggested Citation