Shareholder-Creditor Conflicts and Limits to Arbitrage: Evidence From the Equity Lending Market
43 Pages Posted: 14 Dec 2020 Last revised: 17 Mar 2021
Date Written: December 10, 2020
Conflicts of interests between shareholders and creditors give rise to limits-to-arbitrage through higher short-sale constraints, but are mitigated by dual holders of equity and debt. Using financial institution mergers to identify an exogenous variation in firms' dual holder presence, we find that more dual holdings increase equity lending supply and reduce short-sale constraints. Dual holders make shareholders less likely to restrict lending supply before voting events to exercise control rights. Finally, dual holders increase short selling without rising shorting costs, lower arbitrage risk, and reduce stock overvaluation. These results suggest that shareholder-creditor conflicts have a real impact on market efficiency.
Keywords: Limits to Arbitrage, Dual Holders, Shareholder-Creditor Conflict; Short Selling, Equity Lending
JEL Classification: G21, G30, G34
Suggested Citation: Suggested Citation