Valuation Effects of Short Sale Constraints: The Case of Corporate Takeovers

Abstract

We examine the relation between the degree of short sale constraints for acquiring firms' equity and post takeover stock performance. We find that negative long-run abnormal returns appear to decline (in economic and statistical terms) as the extent and persistence of institutional block-holder ownership increase, after accounting for the size, book-to-market and method of payment effects. In the spirit of Miller (1977), such evidence implies that the degree of short sale constraints serves as an important determinant of acquiring firms' short-run overpricing. It appears that the presence of concentrated institutional presence mitigates and in most cases eliminates, through effective arbitrage, any short-run overpricing that may be responsible for the long-run underperformance of acquirers, preserving in this way efficiency in the takeover markets.

Keywords: short sale constraints, institutional ownership, mergers and acquisitions, long-term wealth effects

JEL Classification: G14, G23, G34