How constraining are limits to arbitrage?

Abstract

We document the existence of a strategy designed to circumvent limits to arbitrage. Faced with short-sale constraints and noise trader risk, small arbitrageurs publicly reveal their information to induce the target's shareholders ("the longs") to sell, thereby accelerating price discovery. Using data for 124 short-sale campaigns in the United States between 2006 and 2011, we show that investors respond strongly to the information, with spikes in SEC filing views, volatility, order imbalances, realized spreads, turnover, and selling by the longs. Share prices fall by an aggregate $14.8 billion. Our findings imply that even extreme short-sale constraints need not constrain arbitrage.