Pavel Savor
Business Economics PhD
Dissertation Chair: Prof. A. Shleifer
Essays in Financial Economics
1. Holding on to Your Shorts: When do Short Sellers Retreat?
Abstract: This paper investigates which factors influence short interest changes. We find that short sellers cover their positions after suffering losses and increase them after experiencing gains. While this relationship is very strong for positions established due to perceived overvaluation, it does not hold for arbitrage trades, where the investor is hedged against stock price movements. Finally, expected returns do not explain the documented short seller behavior, at least in the case of loss-induced covering. We interpret these results as evidence that even sophisticated investors cannot or are not willing to maintain positions after adverse market movements, making arbitrage less effective than envisioned by the efficient market hypothesis.
2. Value for Acquirers?
Abstract: This paper tests the hypothesis that temporarily overvalued firms create value for long-term shareholders by using their equity as currency to acquire other companies. Any conventional approach centered on long-term abnormal returns is complicated by the fact that it is exactly the most overvalued firms that have the greatest incentive to engage in stock-financed acquisitions. To get around this endogeneity problem, I create a sample of mergers that fail for exogenous reasons and use it as a natural experiment. I find that unsuccessful stock bidders underperform successful ones in an economically meaningful and statistically significant way. This underperformance increases with the length of the holding period. Moreover, unsuccessful acquirers continue performing poorly even after merger failure is announced. Finally, the unrealized acquirer-target combination would have earned higher returns than the acquirer did by itself, even without any synergies. None of these results hold for cash-financed bids. This evidence is consistent with the hypothesis that mergers provide an opportunity for mispriced firms to convert their stock into hard assets.
3. Stock Returns after Major Price Shocks: the Impact of Information
Abstract: This paper focuses on stocks that experience major price changes. Using recommendation-issuing analyst reports as a proxy, it studies how information presence affects these stocks' post-event performance. Regression analysis shows that no-information price events experience reversals, while information-based ones do not. This result is robust to different horizons, various methods of measuring performance and a variety of controls for possible bid-ask bounce problems, and is also not driven by post-earnings announcement drift. When I form calendar-time portfolios based on the direction of the price movement and its information status, I find both drift following information-based price moves and reversal following no-information price moves. Potential profits available to investors trading on these two phenomena are both economically meaningful and statistically significant. A portfolio that is long no-information losers and short no-information winners earns abnormal returns of 2.1% per month over a 20-trading day horizon. A portfolio that is long information winners and short information losers earns abnormal returns of 1.4% per month.
