Ownership Structure, Limits to Arbitrage, and Stock Returns: Evidence from Equity Lending Markets

Abstract

We examine how institutional ownership structure gives rise to limits to arbitrage through its impact on short-sale constraints. Stocks with lower, more concentrated, short-term, and less passive ownership exhibit lower lending supply, higher costs of shorting, and higher arbitrage risk. These constraints limit the ability of arbitrageurs to take short positions and delay the correction of mispricing. Stocks with more concentrated ownership exhibit smaller announcement day reactions, larger post-earnings announcement drift, and an additional negative abnormal return of -0.47% in the week following a positive shorting demand shock. (G10, G12, G14) * We are immensely grateful to Dataexplorers (now part of Markit) for providing the equity lending data. We thank

A Study of Determinants of Predictive Accuracy of Analysts? Estimates of Earnings in Indian Markets

“…Our findings suggest that more concentration of shareholding leading to lesser disclosure norms affects the quality of estimates negatively. The study supports the argument build as per earlier studies -ownership pattern is a key determinant of corporate governance and analysts' estimates (Shleifer and Vishny, 1997;La Porta et al, 2000;Porras et al, 2016). However though the outcome is similar, the insights presented here are different to findings of Piotroski and Roulstone (2004).…”

“…Subsequent researchers examined variables that determine the short and long run changes in the recommended stock prices. Bhushan (1989) emphasized on size and number of analysts' following; Lang and Lundholm (1996) on discretionary disclosure; Johnson et al (2000); Porras et al (2016) on corporate ownership structure as variables that affect the quality of analyst estimates.…”

“…As Porras et al (2016) posit, when ownership is concentrated, information is likely to be communicated through private channels, thus decreasing the role of financial analysts. O'Brien and Bhushan (1990) find that analyst following increases when a firms return volatility has declined, increases more for firms with smaller prior analyst following, and increases more for firms in industries with more stringent disclosure requirements and increasing numbers of firms.…”

Short‐Selling Risk

“…Finally, in a recent paper, Prado, Saffi, and Sturgess (2016) examine the crosssectional relation between institutional ownership, short sale constraints, and abnormal stock returns. They find that firms with lower levels of institutional ownership and/or more concentrated institutional ownership tend to have higher equity lending fees, and these firms also tend to earn abnormal returns that are significantly more negative.…”

When Equity Factors Drop Their Shorts

“…Using data from an institutional lender in a sample covering the 2000-01 period, D'Avolio (2002) found that the cost of borrowing a value-weighted loan portfolio in that period was 25 bps a year. Kolasinski, Reed, and Ringgenberg (2013) found annual costs generally above 100 bps between 2003. Porras Prado, Saffi, and Sturgess (2016 found average value-weighted loan fees of 116 bps per year between 2006 and 2010, but fees were 23-35 bps when the available lending supply was plentiful (i.e., in the top three quintiles of lending supply).…”