When Should Investors Short the Stocks of Acquiring Firms? Big-Data Insights from Joining CAR and EVA Style Analysis

Abstract

The authors examine the announcement timing as to when investors should execute a short-selling strategy on the stocks of acquiring firms. The authors assess the gains (or losses) from executing a short-selling strategy immediately at the acquisition announcement or in a “wait to execute” short strategy during the post-acquisition announcement. The authors conduct a big-data empirical analysis with 14,636 acquisitions on the stocks of acquiring firms over the 17-year period, 1990–2016, to assess shorting gains or losses experienced by two major types of deals. Specifically, the authors look at acquirers doing deals with public targets and acquirer deals with private targets. The authors assess the acquirer gains or losses over several sub-periods, including years prior to the global financial crisis (1990–2007), during the financial crisis (2008–2009), and in the post financial crisis period (2010–2016). The authors find that the gains to shorting (or longing) the stocks of acquirers are dependent on the particular deal type (acquirer, public target; acquirer, private target) and whether or not the acquirer is a pre-classified wealth creator or wealth destroyer according to EVA style analysis.