The Market for Corporate Control as a Limit to Short Arbitrage

77 Pages Posted: 14 Jun 2018 Last revised: 1 Apr 2020

See all articles by Costanza Meneghetti

Costanza Meneghetti

Colorado State University, Fort Collins - Department of Finance & Real Estate

Ryan Williams

University of Arizona - Department of Finance

Steven Chong Xiao

University of Texas at Dallas - Naveen Jindal School of Management

Date Written: May 30, 2018

Abstract

We hypothesize that corporate takeover markets create significant constraints for short sellers. Both short sellers and corporate bidders often target firms with declining economic prospects. Yet, a target firm’s stock price generally increases upon a takeover announcement, resulting in trading losses to short sellers. Therefore, short sellers should require higher rates of return when takeover likelihood is higher. Consistent with this prediction, the return predictability of monthly short interest increases with industry-level takeover probability and decreases as takeover defenses are implemented. Our results suggest that efficient takeover markets create trading frictions for short sellers and can therefore inhibit market efficiency.

Keywords: Market for Corporate Control, Short Selling, Limit to Arbitrage

JEL Classification: G12, G14, G34

Suggested Citation

Meneghetti, Costanza and Williams, Ryan and Xiao, Steven Chong, The Market for Corporate Control as a Limit to Short Arbitrage (May 30, 2018). Available at SSRN: https://ssrn.com/abstract=3187447 or http://dx.doi.org/10.2139/ssrn.3187447

Costanza Meneghetti

Colorado State University, Fort Collins - Department of Finance & Real Estate ( email )

Fort Collins, CO 80523
United States

Ryan Williams

University of Arizona - Department of Finance ( email )

McClelland Hall
P.O. Box 210108
Tucson, AZ 85721-0108
United States

Steven Chong Xiao (Contact Author)

University of Texas at Dallas - Naveen Jindal School of Management ( email )

P.O. Box 830688
Richardson, TX 75083-0688
United States

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