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Short sales around M&A announcements


  • Liuqing Mai
  • Robert van Ness
  • Bonnie van Ness


Purpose - The purpose of this paper is to examine changes in short-sale transactions of target firms and acquiring firms around merger and acquisition (M&A) announcements using daily short-sale transaction data from the New York stock exchange and NASDAQ. The paper further aims to investigate the link between short-sale transactions and trading costs. Design/methodology/approach - Two abnormal short-sale measures are developed. Two regression models based on the two short-sale measures are constructed and ordinary least squares is used to estimate the regressions. Two samples to test bid-ask spreads (BAS) before and after M&A announcements Findings - The paper finds that target firms experience significant excess short sales (ES) from day-1 to day+7; while acquiring firms experience significant ES from day 0 to day+20. For acquiring firms, the five-day pre-announcement abnormal short sale is negatively related to the announcement day return and is positively related to post-announcement return. Such a relationship for target firms is not observed. For target firms, it is found that changes in short activity are not significantly related to changes in trading cost. For acquiring firms, short activity changes are positively related to quoted spreads and percentage quoted spreads. The short-sale activity changes are negatively related to effective spreads. Research limitations/implications - The paper is a first step to understanding whether short sales affect market liquidity around M&A announcements; therefore restriction is necessary. Additional research can be done which should extend the current study to include the options market. Practical implications - From the results, the paper cannot conclude that short sellers are informed traders around M&A announcements. Therefore restrictions on short sales around M&A announcements may not be warranted. Originality/value - The paper fills an important blank in the existing literature by examining short-sale transactions around M&A announcements. Such an investigation is of particular interest to market regulators as they try to update the short-sale rules.

Suggested Citation

  • Liuqing Mai & Robert van Ness & Bonnie van Ness, 2009. "Short sales around M&A announcements," Journal of Financial Economic Policy, Emerald Group Publishing, vol. 1(2), pages 177-197, May.
  • Handle: RePEc:eme:jfeppp:v:1:y:2009:i:2:p:177-197

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    References listed on IDEAS

    1. Claudio Borio & Piti Disyatat, 2010. "Unconventional Monetary Policies: An Appraisal," Manchester School, University of Manchester, vol. 78(s1), pages 53-89, September.
    2. John C. Williams, 2011. "Unconventional monetary policy: lessons from the past three years," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct3.
    3. Yeva Nersisyan & L. Randall Wray, 2010. "Does Excessive Sovereign Debt Really Hurt Growth? A Critique of This Time Is Different, by Reinhart and Rogoff," Economics Working Paper Archive wp_603, Levy Economics Institute.
    4. James D. Hamilton & Jing Cynthia Wu, 2012. "The Effectiveness of Alternative Monetary Policy Tools in a Zero Lower Bound Environment," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44, pages 3-46, February.
    5. Daniel Leigh & Andrea Pescatori & Jaime Guajardo, 2011. "Expansionary Austerity New International Evidence," IMF Working Papers 11/158, International Monetary Fund.
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