Alphas in Trading with Value of Votes

Abstract

Stock prices contain expected lending fees. However, investors anticipate adverse effects from short selling: Put option writers short to hedge, and option prices reflect the costs. An extended put-call parity shows that these cancel each other out to weaken the equity lending channel to stock prices. Firms with higher put-call parity violations (V) earn lower monthly risk-adjusted returns (80 bps). Results for uncontested firms are insignificant, contrary to contested stocks producing 80 bps. Alphas significantly increase when control matters, and predictability disappears for synthetic stocks without voting rights. Empirically, the value of voting rights determines V to predict stock returns.

Keywords: Voting rights, Control rights, Stock returns, Return predictability, Options

JEL Classification: G12, G32, G34