Merger Arbitrage Short Selling and Price Pressure

42 Pages Posted: 9 Mar 2013 Last revised: 10 Sep 2018

See all articles by Tingting Liu

Tingting Liu

Iowa State University

J. (Julie) Wu

University of Nebraska - Lincoln

Date Written: March 2014

Abstract

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of shorting activity and associated returns for floating-exchange-ratio stock acquirers, at deal closings and among withdrawn stock deals further supports merger arbitrage price pressure explanation.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

Liu, Tingting and Wu, J. (Julie), Merger Arbitrage Short Selling and Price Pressure (March 2014). Journal of Corporate Finance, 2014 Forthcoming. Available at SSRN: https://ssrn.com/abstract=2230048 or http://dx.doi.org/10.2139/ssrn.2230048

Tingting Liu

Iowa State University ( email )

2330 Gerdin Business Building
Ames, IA 50011
United States

J. (Julie) Wu (Contact Author)

University of Nebraska - Lincoln ( email )

Lincoln, NE 68588
United States

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