A Short Walk on Wall Street - Does Short Selling Exposure Improve M&A Quality?

Sammanfattning: We examine whether short sellers are a source of effective corporate governance in the context of M&A. Using a sample of 9,386 U.S. mergers & acquisitions from 2002 to 2016, we find that acquirers subject to more short interest experience significantly higher announcement period abnormal stock returns. Our results indicate that short sellers are a channel through which financial markets discipline management. The effect is more pronounced for acquirers with high leverage, high Tobin's q, weaker recent stock performance, and smaller total assets. We also find indicative evidence that the explanatory power of short selling on announcement period bidder returns is higher than that of internal governance mechanisms identified in previous studies. Finally, using a S.E.C. regulatory experiment, we show that short selling constraints might interfere with the beneficial disciplining force of short sellers on acquisitions.