The Market for Corporate Control as a Limit to Short Arbitrage

Abstract We hypothesize that corporate takeover markets create significant constraints for short sellers. Both sellers and bidders often target firms with declining economic prospects. Yet, a firm’s stock price generally increases upon announcement, resulting in losses Therefore, should require higher rates of return when the likelihood is higher. Consistent this prediction, predictability monthly interest industry-level probability decreases as defenses are implemented. Our results suggest efficient trading frictions can therefore inhibit overall market efficiency.