Short sales around M&A announcements

Abstract

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 t‐test are used.

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.

Citation

Mai, L., van Ness, R. and van Ness, B. (2009), "Short sales around M&A announcements", Journal of Financial Economic Policy, Vol. 1 No. 2, pp. 177-197. https://doi.org/10.1108/17576380911010272