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Short Selling and Price Pressure Around Merger Announcements

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  • Benjamin Blau
  • Kathleen Fuller
  • Chip Wade

Abstract

Prior research argues that short selling by merger arbitrageurs adds downward pressure to the stock prices of acquiring firms, particularly for firms that use stock financing. We test this hypothesis by examining daily short sale data surrounding merger announcements. Our initial results show that short selling activity surges in response to merger announcements and that abnormal post-announcement short selling is driven by those mergers that use stock financing. This result is consistent, in part, with the presence of merger arbitrage. However, additional tests show that the negative post-announcement stock returns to acquiring firms are orthogonal to the level of post-announcement short selling activity. These findings extend the current literature by showing that, while post-announcement short selling is abnormally high, this short selling does not put undue pressure on acquiring firms’ stock prices. Copyright Springer Science+Business Media New York 2015

Suggested Citation

  • Benjamin Blau & Kathleen Fuller & Chip Wade, 2015. "Short Selling and Price Pressure Around Merger Announcements," Journal of Financial Services Research, Springer;Western Finance Association, vol. 48(2), pages 143-160, October.
    • Handle: RePEc:kap:jfsres:v:48:y:2015:i:2:p:143-160
    DOI: 10.1007/s10693-014-0197-3
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    Cited by:

    1. Richard Herron, 2022. "How Much Does Your Banker’s Target-Specific Experience Matter? Evidence from Target IPO Underwriters that Advise Acquirers," Journal of Financial Services Research, Springer;Western Finance Association, vol. 61(2), pages 217-258, April.
    2. Lai, Shaojie & Pu, Xiaoling, 2020. "Mispricing or growth? an empirical analysis of acquisition premium," Finance Research Letters, Elsevier, vol. 37(C).

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    More about this item

    Keywords

    Short Selling; Merger and acquisition; Informed trading; Merger characteristics; Merger arbitrage; G14; G19; G30;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G19 - Financial Economics - - General Financial Markets - - - Other
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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