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Market efficiency and limits to arbitrage: Evidence from the Volkswagen short squeeze

with Franklin Allen, Marlene Haas, and Eric Nowak

Journal of Financial Economics, (2021) 142 (1): 166-194, [coverage by Harvard Law School Blog]


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) 60 (4): 3253-3277, [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

Valuation and long-term growth expectations

with Josef Zechner and Jeff Zwiebel



Abstract: Long-term growth expectations are central to investment analysis and corporate valuation. Despite a dominant effect on firm value, the academic literature and practitioner conventions provide little guidance on how this long-term growth rate should be determined. This paper takes a step in addressing this gap: we estimate the relation between long-term growth and an extensive selection of firm, industry, and market characteristics. Market prices do not seem to fully capture long-term growth information. Cross-sectional tests yield substantial positive abnormal returns for firms with high expected long-term growth.


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

Squeezing shorts through social media platforms

with Franklin AllenMarlene HaasEric Nowak, and Matteo Pirovano


Abstract: At the end of January 2021, a group of stocks listed on US stock exchanges experienced sudden price increases, which – coupled with high short interest – led to short-squeeze episodes. We find that these events were fueled by retail investors and social media platforms. Options markets also played a central role. Using hand-collected data we provide the first rigorous study of these short squeezes and show that they significantly impeded market quality for the stocks at issue and their competitors. Increased retail investor participation thus has risks as well benefits.

Presentations: AEA, EFA, WFA, SFI Research Days Gerzensee, The Annual Conference on Financial Market Regulation (CFMR), Kansas, Paris December Finance Meeting, German Finance Association Annual Meeting, FMA USA

How Prevalent Are Short Squeezes? Evidence From the US and Europe [coverage by Harvard Law School Blog]

with Franklin AllenMarlene Haas, and Matteo Pirovano



Abstract: A short squeeze is triggered if there is pressure on short sellers to cover their positions because of a sharp price increase or a recall of borrowed shares. This drives short sellers to close their positions early. We find that stock-day short-squeeze events are rare and short-lived. However, the proportion of unique stocks experiencing a short squeeze in a given year is 25% in both the US and the EU. While we find an uptick in the number of firms experiencing a squeeze in recent years in the US, squeezes are relatively constant across time in the EU. We also review the academic literature on the topic and provide directions for future research.


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

Do Loans Carry a Control Spread? Evidence from the Allocation of Control Rights Across Creditors

with Marc Arnold and Nicola Kollmann

Abstract: This study investigates the influence of creditor control rights on the pricing of corporate loans. Using a novel hand-collected dataset, we differentiate between individual creditors who receive and do not receive control rights after a covenant violation. This differentiation allows us to isolate the influence of shifts in control rights on loan pricing from that of other factors related to covenant violations. We find that creditors exploit control rights to overprice new loans and that this pricing friction in the loan market is of first-order importance in explaining the variation in loan prices and the loan premium puzzle.

Presentations: NYU Stern Law and Finance, MFA, SGF Conference, University of Zurich, EPFL Lausanne, University of St. Gallen, German Finance Association Annual Meeting, University of Paderborn, Financial Markets and Corporate Governance Conference, SFI Research Days Gerzensee, Federal Reserve Bank of Kansas

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