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The Market for Corporate Control as a Limit to Short Arbitrage

Author

Listed:
  • C. Meneghetti

    (CSU - Colorado State University [Fort Collins])

  • Ryan Williams

    (DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris sciences et lettres - CNRS - Centre National de la Recherche Scientifique)

  • S. C. Xiao

    (UT Dallas - University of Texas at Dallas [Richardson])

Abstract

We hypothesize that corporate takeover markets create significant constraints for short sellers. Both short sellers and corporate bidders often target firms with declining economic prospects. Yet, a target firm's stock price generally increases upon a takeover announcement, resulting in losses for short sellers. Therefore, short sellers should require higher rates of return when takeover likelihood is higher. Consistent with this prediction, the return predictability of monthly short interest increases with industry-level takeover probability and decreases as takeover defenses are implemented. Our results suggest that efficient takeover markets create trading frictions for short sellers and can therefore inhibit overall market efficiency.

Suggested Citation

  • C. Meneghetti & Ryan Williams & S. C. Xiao, 2022. "The Market for Corporate Control as a Limit to Short Arbitrage," Post-Print hal-04211499, HAL.
    • Handle: RePEc:hal:journl:hal-04211499
    DOI: 10.1017/S0022109022001302
    Note: View the original document on HAL open archive server: https://hal.science/hal-04211499
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    References listed on IDEAS

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    Keywords

    Market for Corporate Control; Short Selling; Limit to Arbitrage;
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