This paper extends the literature on predatory short selling and bailouts through a joint analysis of the two. We consider a model with informed short sales, as well as uninformed predatory short sales, which can trigger the inefficient liquidation of a firm. We obtain several novel results: A government commitment to bail out insolvent firms with positive probability can increase welfare because it selectively deters predatory short selling without hampering desirable informed short sales. Contrasting a common view, bailouts can be optimal ex ante but undesirable ex post. Furthermore, bailouts in our model are a better policy tool than short selling restrictions. Welfare gains from the bailout policy are unevenly distributed: shareholders gain while taxpayers lose. Bailout taxes allow ex-ante Pareto improvements.
"This paper demonstrates that short sales are often misclassified as buyer-initiated by the Lee-Ready and other commonly used trade classification algorithms. This result is due in part to regulations which require short sales be executed on an uptick or zero-uptick. In addition, while the literature considers "immediacy premiums" in determining trade direction, it ignores the often larger borrowing premiums which short sellers must pay. Since short sales constitute approximately 30% of all trade volume on U.S. exchanges, these results are important to the empirical market microstructure literature as well as to measures that rely upon trade classification, such as the probability of informed trading (PIN) metric"--National Bureau of Economic Research web site
PurposeThe 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/approachTwo 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.FindingsThe 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/implicationsThe 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 implicationsFrom 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/valueThe 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.
