Does Short-selling Threat Discipline Managers in Mergers and Acquisitions Decisions?

42 Pages Posted: 4 Nov 2013 Last revised: 8 Dec 2018

See all articles by Eric C. Chang

Eric C. Chang

University of Hong Kong - School of Business

Tse-Chun Lin

The University of Hong Kong - Faculty of Business and Economics

Xiaorong Ma

University of Hong Kong - School of Business; National Taiwan University - College of Management

Date Written: December 7, 2018

Abstract

We explore the governance effect of short-selling threat on mergers and acquisitions (M&A). We use equity lending supply (LS) to proxy for the threat, as short sellers’ incentives to scrutinize a firm depend on the availability of borrowing shares. Our results show that acquirers with higher LS have higher announcement returns. The effect is stronger when acquirers are more likely to be targets of subsequent hostile takeovers and when their managers’ wealth is more linked to stock prices. We conduct four sets of tests to mitigate endogeneity concerns. Finally, the governance effect exists only for deals prone to agency problems.

Keywords: mergers and acquisitions, short-selling threat, external corporate governance, lending supply, announcement returns

JEL Classification: G14, G34, M40, M41

Suggested Citation

Chang, Eric Chieh C. and Lin, Tse-Chun and Ma, Xiaorong, Does Short-selling Threat Discipline Managers in Mergers and Acquisitions Decisions? (December 7, 2018). Journal of Accounting & Economics (JAE), Vol. 67, No. 1, 2019; Finance Down Under 2015 Building on the Best from the Cellars of Finance Paper. Available at SSRN: https://ssrn.com/abstract=2348193 or http://dx.doi.org/10.2139/ssrn.2348193

Eric Chieh C. Chang

University of Hong Kong - School of Business ( email )

Meng Wah Complex
Pokfulam Road
Hong Kong
China

Tse-Chun Lin (Contact Author)

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Xiaorong Ma

University of Hong Kong - School of Business ( email )

Pokfulam Road
Hong Kong, Pokfulam HK
China

National Taiwan University - College of Management ( email )

Department and Graduate Institute of Finance
College of Management
Taipei 106
Taiwan

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