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

45 Pages Posted: 14 Dec 2020 Last revised: 22 Nov 2021

See all articles by Yongqiang Chu

Yongqiang Chu

Belk College of Business, UNC Charlotte

Luca X. Lin

HEC Montreal - Department of Finance

Pedro A. C. Saffi

University of Cambridge - Judge Business School

Jason Sturgess

Queen Mary University of London

Date Written: November 11, 2021

Abstract

We show that conflicts of interest between shareholders and creditors affect prices in financial markets through the equity lending market and short selling constraints. Using mergers between financial institutions as exogenous variation in the presence of dual holders, that is, institutions holding equity and debt of the same firm, we find that shareholders increase equity lending supply when they face lower conflicts, which reduces short sale constraints and limits to arbitrage and increases price efficiency. The decrease in short sale constraints is more pronounced in firms with ex-ante greater conflicts of interest between shareholders and creditors. Our findings suggest that agency problems due to shareholder-creditor conflicts have a real impact on market efficiency and asset prices.

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 (November 11, 2021). 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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