Shareholder-Creditor Conflicts and Limits to Arbitrage: Evidence From the Equity Lending Market

50 Pages Posted: 14 Dec 2020 Last revised: 22 Dec 2023

See all articles by Yongqiang Chu

Yongqiang Chu

Belk College of Business, UNC Charlotte

Luca X. Lin

HEC Montreal - Department of Finance

Pedro Saffi

University of Cambridge - Judge Business School

Jason Sturgess

Queen Mary University of London

Date Written: December 18, 2023

Abstract

We show that higher conflicts of interest between shareholders and creditors create limits to arbitrage by increasing short-sale constraints in equity lending markets. Using the presence of dualholders, who hold both equity and debt of the same firm, as a measure of reduced shareholder-creditor conflicts, we find that shareholders are more willing to lend shares to short sellers when concerns over creditor expropriation are lower. Exploiting exogenous reduction in certain dualholders' motivation to align shareholder-creditor incentives resulting from their compliance with the Volcker Rule, we find that dualholders effectively alleviate shareholder-creditor conflicts, reducing short-sale constraints and arbitrage risk. Our findings highlight how agency problems arising from shareholder-creditor conflicts impact equity price efficiency.

Keywords: Limits to Arbitrage, Dual Holders, Shareholder-Creditor Conflict, Short Selling, Equity Lending

JEL Classification: G21, G30, G34

Suggested Citation

Chu, Yongqiang and Lin, Luca Xianran and Saffi, Pedro A. C. and Sturgess, Jason, Shareholder-Creditor Conflicts and Limits to Arbitrage: Evidence From the Equity Lending Market (December 18, 2023). Proceedings of Paris December 2021 Finance Meeting EUROFIDAI - ESSEC, Available at SSRN: https://ssrn.com/abstract=3747035 or http://dx.doi.org/10.2139/ssrn.3747035

Yongqiang Chu

Belk College of Business, UNC Charlotte ( email )

9201 University City Boulevard
Charlotte, NC 28223
United States
7046877695 (Phone)

Luca Xianran Lin (Contact Author)

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Pedro A. C. Saffi

University of Cambridge - Judge Business School ( email )

Trumpington Street
Cambridge, CB2 1AG
United Kingdom

HOME PAGE: http://www.pedrosaffi.com

Jason Sturgess

Queen Mary University of London ( email )

Mile End Road
London, London E1 4NS
United Kingdom

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