Does Short-selling Threat Discipline Managers in Mergers and Acquisitions Decisions?

We explore the governance effect of short-selling threat on mergers and acquisitions (M&A). We use equity lending supply (LS) to proxy for the threat, as short sellers' incentives to scrutinize a firm depend on the availability of borrowing shares. Our results show that acquirers with higher LS have higher announcement returns. The effect is stronger when acquirers are more likely to be targets of subsequent hostile takeovers and when their managers' wealth is more linked to stock prices. We conduct four sets of tests to mitigate endogeneity concerns. Finally, the governance effect exists only for deals prone to agency problems