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

43 Pages Posted: 14 Dec 2020 Last revised: 17 Mar 2021

See all articles by Yongqiang Chu

Yongqiang Chu

Belk College of Business, UNC Charlotte

Luca Xianran Lin

University of Navarra, IESE Business School

Pedro A. C. Saffi

University of Cambridge - Judge Business School

Jason Sturgess

Queen Mary University of London

Date Written: December 10, 2020

Abstract

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

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 10, 2020). IESE Business School Working Paper, 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)

University of Navarra, IESE Business School ( email )

Avenida Pearson, 21
IESE Business School, H-300
Barcelona, Barcelona 08034
Spain

HOME PAGE: http://lucaxlin.com

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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