Limits to Short Arbitrage With Takeover Risk

58 Pages Posted: 14 Jun 2018  

Costanza Meneghetti

West Virginia University

Ryan Williams

University of Arizona - Department of Finance

Steven Chong Xiao

University of Texas at Dallas - Naveen Jindal School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: May 30, 2018

Abstract

We hypothesize that the risk of takeover bids creates significant limits to short-selling activities. A target firm’s price often increases substantially upon the announcement of a takeover bid, forcing short sellers to cover their positions. This causes additional short-term price overshoot. Therefore, short sellers require a higher rate of return when the likelihood of a takeover is high. Consistent with this intuition, ex-ante return predictability of monthly short interest increases with industry-level takeover activities and decreases with the implementation of takeover defenses. Our results suggest that efficient markets for corporate control may have unintended effects in inducing stock market inefficiencies.

Keywords: Short Selling, Limits to Arbitrage, Takeover

JEL Classification: G12, G14, G34

Suggested Citation

Meneghetti, Costanza and Williams, Ryan and Xiao, Steven Chong, Limits to Short Arbitrage With Takeover Risk (May 30, 2018). Available at SSRN: https://ssrn.com/abstract=3187447 or http://dx.doi.org/10.2139/ssrn.3187447

Costanza Meneghetti

West Virginia University ( email )

PO Box 6025
Morgantown, WV 26506
United States
304-293-7889 (Phone)

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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