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Short-selling restrictions, takeovers and the wealth of long-run shareholders

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  • Pinheiro, Marcelo

Abstract

In this paper we consider a situation in which a firm may be able to influence the investors' ability to short-sell its stock. We analyze the effect short-selling restrictions have on the market price and the subsequent effect generated on the market for corporate control. More precisely, we argue that short-selling restrictions may lead to exclusion of pessimistic beliefs and may therefore inflate prices. Thus, if a company is poorly managed and has a stock with strong short-selling restrictions, a profitable takeover will not emerge because of the high stock price. The raider may not have the incentives to acquire the company as its price will be above its fundamental value, conditional on takeover, even accounting for the potential benefits of takeover. We then argue that such effects are detrimental to long-run shareholders and that a value-maximizing strategy is to have a stock with no short-selling restrictions.

Suggested Citation

  • Pinheiro, Marcelo, 2009. "Short-selling restrictions, takeovers and the wealth of long-run shareholders," Journal of Mathematical Economics, Elsevier, vol. 45(5-6), pages 361-375, May.
  • Handle: RePEc:eee:mateco:v:45:y:2009:i:5-6:p:361-375
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    References listed on IDEAS

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    Cited by:

    1. Swastika, Putri & Dewandaru, Ginanjar & Masih, Mansur, 2013. "Does Restricted Short Selling Bring Benefit to Stocks Listed in Islamic Capital Market? New Evidence from Malaysia based on Dynamic Panel Heterogeneous Techniques," MPRA Paper 58833, University Library of Munich, Germany.

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    Keywords

    Short-selling Takeovers;

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