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Valuation Effects of Short Sale Constraints: the Case of Corporate Takeovers


  • We would like to thank John Doukas (the editor), David Hillier, Fengliang Liu, Dimitris Petmezas, Frederik Schlingemann, Robert Watson, seminar participants at the 2004 French Finance Association (AFFI) Meeting, 2005 European Financial Management Association (EFMA) Corporate Governance Symposium, 2005 Financial Management Association (FMA) European Meeting and especially two anonymous referees for helpful comments and suggestions.


We examine the relation between the degree of short sale constraints for acquiring firms' equity and post takeover stock performance. We find that negative long-run abnormal returns appear to decline (in economic and statistical terms) as the extent and persistence of institutional block-holder ownership increase, after accounting for the size, book-to-market and method of payment effects. In the spirit of Miller (1977), such evidence implies that the degree of short sale constraints serves as an important determinant of acquiring firms' short-run overpricing. It appears that the presence of concentrated institutional presence mitigates and in most cases eliminates, through effective arbitrage, any short-run overpricing that may be responsible for the long-run underperformance of acquirers, preserving in this way efficiency in the takeover markets.