Closing the deal: Managerial response to short sellers following M&A announcement

Abstract

When firms announce a merger or acquisition, shareholders, analysts, and the media respond. Firms are less likely to complete a deal when those reactions are negative. We, however, uncover a scenario where the opposite occurs. When short interest (i.e., the percentage of shares shorted) increases following announcement of a deal, managers at firms become more likely to complete the deal. We theorize that short selling after deal announcement constitutes an ego threat to managers that induces escalation of commitment. This is because short sellers are adversarial, or they win when stock prices fall. Moreover, we argue that this managerial response is heightened in situations where managers are more likely to be defensive about their decisions, such as when the deal is large or the target firm is publicly-traded. Our empirical findings lend support to the arguments.