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

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. (c) 2021 Elsevier B.V. All rights reserved.

Automated summary

In 2008, Porsche's unexpected domination plan for Volkswagen caused a short squeeze that briefly made Volkswagen the most valuable listed company in the world. This manipulation, aimed at saving Porsche from insolvency, significantly impeded market efficiency.