Short Selling Around Corporate Acquisitions

Using daily short sale transactions data for firms traded in the Taiwan Stock Exchange (TWSE) from January 1991 to January 2007, we examine the pattern of short selling trading prior to 338 acquisition announcements. Consistent with the view that short sellers act as informed traders, we find that they have the ability to predict and time their trades prior to significant negative acquisition announcements. Specifically, our evidence shows that abnormal short selling prior to acquisition announcements is significantly associated with negative (bad acquisition news) post-announcement abnormal returns. The empirical results also show that short sellers act as specialized monitors who generate and release value-relevant information to the stock market prior to actual bad acquisition events. In addition, we find that short selling is driven by speculative rather than hedging motives. Robustness checks and the undertaking of alternative tests show that daily changes in short sales transactions lead future stock prices, consistent with the notion that the information advantage of short sellers broadens the informational efficiency of stock prices