Short Sales, Payment Methods, and Mergers and Acquisition Announcements

Abstract

This paper examines the information content of short-selling prior to merger and acquisition (M&A) announcements for acquiring firms and presents new evidence that short-selling activity is closely linked to the choice of payment method for M&A. In particular, short-selling increases prior to stock-financed but not cash-financed M&A. More importantly, the proportion of price-setting short-selling greatly exceeds the market price-setting trading as a whole for stock-financed acquirers but not cash-financed acquirers. This suggests that short-sellers are informed of not only the upcoming announcements, but also the methods of payment. Additionally, our results also indicate that preannouncement short-selling contain information about the likelihood of the success of the future deal.