Market Efficiency and Limits to Arbitrage: Evidence from the Volkswagen Short Squeeze

with Franklin Allen, Marlene Haas, and Eric Nowak

Journal of Financial Economics, 2020, forthcoming


Abstract: On October 26, 2008, Porsche announced a largely unexpected domination plan for Volkswagen. The resulting short squeeze in Volkswagen's stock briefly made it the most valuable listed company in the world. We argue that this was a manipulation designed to save Porsche from insolvency and the German laws against this kind of abuse were not effectively enforced. Using hand-collected data we provide the first rigorous academic study of the Porsche-VW squeeze and show that it significantly impeded market efficiency. Preventing manipulation is important because without efficient securities markets, the EU's major project of the Capital Markets Union cannot be successful.

In Peer-Reviewed Journals

Levered and inverse VIX ETP option contract adjustments: No harm, no foul?

with Bob Whaley

solicited by Accounting & Finance, 2020, forthcoming, [coverage by Bloomberg]


Abstract: The terms of exchange‐traded stock option contracts are usually adjusted when corporate actions take place. These adjustments are made to safeguard the value of the outstanding option contracts. Recently, a new type of corporate event has appeared − levered and inverse exchange‐traded product issuers are reducing leverage ratios with increased frequency. While such changes directly affect option values, no contract adjustments are made, resulting in windfall transfers of wealth from outstanding long to outstanding short option holders. In one instance alone, the transfer was more than $US 100 million. To remedy the problem, we offer a simple contract adjustment procedure.

Working Papers

The Value of Borrowing Diversity: Evidence from the Financial Crisis of 2007-2009 

      Best Paper Award, Swiss Society for Financial Market Research


Abstract: Does borrowing diversity (i.e., borrowing via a larger number of debt types) affect how firms respond to an exogenous credit supply shock? To answer this question I use the recent 2007-2009 credit crisis as a negative exogenous credit supply shock to U.S. non-financial companies. Applying a difference-in-differences methodology, I find that during the crisis companies that ex ante borrowed from many debt types had significantly higher capital expenditures than otherwise similar companies that borrowed from fewer debt types. The former group also had higher market valuations, a lower cost of debt, a lower reduction in debt issuance, higher leverage ratios, and a lower need to use internal cash during the crisis. This evidence is robust to applying an instrumental variable estimation, which takes into account the endogenous nature of the diversity measure. Finally, further tests suggest that borrowing diversity could represent a valid measure for financial constraints.


Presentations: Georgetown University, University of Miami, Federal Reserve Board of GovernorsFederal Reserve Bank of Richmond, FMA USA, SFI Corporate Finance Workshop, Erasmus University, BI Norwegian Business School, ESADE, Cornerstone Research, EFA Doctoral Tutorial, SGF Conference, Australasian Finance and Banking Conference, Northwestern Causal Inference Workshop, EFMA, Austrian Working Group on Banking, University of Vienna, VGSF Annual Students Conference

Accounting Covenants in Credit Lines: Protecting Banks Against Aggregate Liquidity Shocks

with Maria Chaderina and Christian Laux


Abstract: We discuss a novel role for covenants and accounting-performance measures in credit lines. During aggregate liquidity shortages, banks need to ration liquidity. Credit line covenants allow a bank to revoke the credit line if a firm's accounting-performance measure falls below some threshold. Revoking credit lines protects banks against severe aggregate liquidity shocks. Idiosyncratic and transitory shocks in the accounting-performance measure have two benefits. First, they introduce randomness in covenant violations that eliminates concerns of favouritism when banks ration liquidity. Second, when transitory shocks are correlated with the level of aggregate liquidity shock, the likelihood of covenant violations after severe aggregate shocks is higher than in normal times, improving the allocation of liquidity. Implicit liquidity insurance can complement covenants, inducing banks to revoke credit lines of covenant violators only after severe aggregate shocks, not in normal times. Consistent with this revocation pattern, we find a positive association between covenant violations and credit line revocations in the crisis of 2007-2008, controlling for firm fundamentals, but not outside the crisis.


Presentations: Columbia Business School*, Cass Business School*, NYU Stern*, Temple University*, University of Washington*, VGSF, The Accounting Research
Workshop in Zurich*, European Accounting Association*, The Accounting Group Meeting of the German Economic Association*, EWFS*, FDIC/JFSR conference*, University of Melbourne*

Valuation and long-term growth expectations

with Josef Zechner and Jeff Zwiebel


Abstract: A standard DCF corporate valuation usually includes a terminal value based on a long-term growth rate to reflect value from beyond the typical forecasting horizon of three to seven years. Despite often having a dominant effect on overall firm value, both the academic literature and practitioner conventions provide very little guidance on how this long-term growth rate should be determined. This paper addresses this gap: we undertake an exploratory analysis of how firms’ long-term growth is related to various firm and industry characteristics. We apply an extensive selection of potential predictors based on firm, industry, and market characteristics, in order to explain the variation in firms’ long-term growth rates. As such, we provide a predicted long-term growth rate for all firms, which can then be used as an input into a DCF valuation. We find that market prices do not seem to capture the full information that we find in long-term growth predictions. Thus, a trading strategy that goes long the decile with the highest long-term growth expectations and short the bottom decile yields positive and statistically significant abnormal returns in the range from ten to thirteen percent per year.


Presentations: Vanderbilt, VGSF, Spängler IQAM, St. Gallen, NFA, FMA USA, University of Maryland, Johns Hopkins University

Trading around a Short Squeeze Under the Microscope (work-in-progress)

with Franklin Allen, Marlene Haas, and Eric Nowak

Creditor Control Rights and the Pricing of Private Loans (work-in-progress)

with Marc Arnold and Nicola Kollmann

© 2020 by Angel Tengulov