Endogenous Limits to Arbitrage and Price Informativeness

50 Pages Posted: 13 Apr 2022 Last revised: 19 Apr 2022

See all articles by Di Cui

Di Cui

Central University of Finance and Economics (CUFE)

Oyvind Norli

BI Norwegian Business School - Department of Financial Economics; European Corporate Governance Institute (ECGI)

Johann Reindl

BI Norwegian Business School

Date Written: March 15, 2022

Abstract

Theory suggests that traders will be more reluctant to trade on negative private information about an ongoing merger if their trading will cause the merger to be canceled. This paper provides evidence on the existence of such endogenous limits to arbitrage and it's consequence on the informativeness of prices. Using the existence of an acquirer termination fees as a proxy for the commitment not to cancel the transaction, we show that post announcement acquirer stock prices contain more firm specific information when such a commitment exists than when it does not exist. This suggest that investors with negative private information are more willing to trade on their information when managers are prevented from using this information to adjust their decisions.

Keywords: Limits to arbitrage, Termination fee, Feedback

Suggested Citation

Cui, Di and Norli, Oyvind and Reindl, Johann, Endogenous Limits to Arbitrage and Price Informativeness (March 15, 2022). Available at SSRN: https://ssrn.com/abstract=4058600 or http://dx.doi.org/10.2139/ssrn.4058600

Di Cui

Central University of Finance and Economics (CUFE) ( email )

39 South College Road
Haidian District
Beijing, Beijing 100081
China

Oyvind Norli (Contact Author)

BI Norwegian Business School - Department of Financial Economics ( email )

Nydalsveien 37
Oslo, N-0442
Norway
+4746410514 (Phone)

HOME PAGE: http://https://home.bi.no/oyvind.norli/

European Corporate Governance Institute (ECGI) ( email )

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

Johann Reindl

BI Norwegian Business School ( email )

Nydalsveien 37
Oslo, 0442
Norway

HOME PAGE: johann.reindl@vgsf.ac.at

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