Determinants and implications of arbitrage holdings in acquisitions

Hsieh, Jim; Walkling, Ralph A.

doi:10.1016/j.jfineco.2004.08.003

Cited by 62 publications

(22 citation statements)

References 28 publications

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“…Deals involving activist arbitrageurs have on average a higher revision return (defined as the increase in the acquirer's bid scaled by target share price immediately before the initial takeover announcement; the premium revision measure includes special dividends for nine activist‐targeted deals and 20 nonevent deals, all of which are collected from definitive merger agreements). In contrast, passive arbitrage is not associated with a significant positive premium revision, which is in line with Hsieh and Walkling () and reflects the defining property of the passive investment strategy. In addition, the probability of multiple bidders for activist‐involved deals, at 26.4%, is 19.4 and 14.7 percentage points higher than for the passive‐only and no‐arbitrage subsamples, respectively, with the differences significant at the 1% level.…”

Section: Deal Selection By Activist Arbitrageurssupporting

confidence: 87%

“…Our sample of M&As announced between January 1, 2000 and December 31, 2015 is constructed using the Securities Data Company (SDC) database. We include all attempted acquisitions, whether they are completed, applying the following filters commonly used in prior M&A literature (Hsieh and Walkling (), Gaspar, Massa, and Matos (), Baker and Savasoglu ()): (1) the target company must be covered by CRSP before a deal announcement; (2) the acquirer must own less than 50% of the target's stock before the acquisition and more than 50% after the acquisition; (3) each deal must be classified as a stock, cash, or hybrid (part stock and part cash) deal; and (4) the transaction must not be classified by the SDC as a divestiture, spin‐off, or repurchase. These criteria result in an initial sample of 4,547 deals.…”

Section: Data Sources and Sample Overviewmentioning

confidence: 99%

“…Passive risk arbitrageurs are investors who purchase stocks after an acquisition announcement for the purpose of voting on the deal but do not openly criticize or campaign against the deal or attempt to change its major terms. Estimates of total passive arbitrage funds' ownership of a target's shares subsequent to a merger announcement range from 15% during 1992 to 1999 (Hsieh and Walkling ()) to 35% during 1985 to 2004 (Officer ()). To identify passive arbitrageurs, we follow the methodology developed by Hsieh and Walkling (), based on Thomson Reuters's 13F institutional ownership information.…”

Section: Data Sources and Sample Overviewmentioning

confidence: 99%

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Influencing Control: Jawboning in Risk Arbitrage

Jiang¹,

Li²,

Mei³

2018

The Journal of Finance

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In an “activist risk arbitrage,” a shareholder attempts to improve terms of an announced M&A through public campaigns. Activists target deals with low premiums and those susceptible to managerial conflicts of interest, including going‐private deals and deals in which CEOs receive outsized payments. Activist arbitrageurs are associated with a significant decrease in the probability that targets will be sold to the announced bidders, and an increase in the premium paid, both ex post among surviving deals and ex ante among all deals. Activist arbitrage serves as a governance mechanism in M&A and earns higher returns than passive arbitrage.

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Section: Deal Selection By Activist Arbitrageurssupporting

confidence: 87%

Section: Data Sources and Sample Overviewmentioning

confidence: 99%

Section: Data Sources and Sample Overviewmentioning

confidence: 99%

See 1 more Smart Citation

Influencing Control: Jawboning in Risk Arbitrage

Jiang¹,

Li²,

Mei³

2018

The Journal of Finance

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“…Rather, they do so to derive the expectations of other traders about the likelihood of an event -the merger -that will, in the end, happen or not happen. And that event, the merger, is by and large independent of the collective wagers of the arbitrage community (although there is debate on this point -see Larcker and Lys 1987;Corelli and Li 2002;Hsieh and Walkling 2005). Thus, the specific form of specularity involved in merger arbitrage differs from Keynes (1936) view of financial markets as beauty pageants (see Dupuy 1989) in that arbitrageurs can collectively be wrong.…”

Section: Economic Sociology and The Problem Of Anonymitymentioning

confidence: 99%

From Dissonance to Resonance: Cognitive Interdependence in Quantitative Finance

Beunza¹,

Stark

2011

SSRN Journal

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This study explores the elusive social dimension of quantitative finance. We conducted three years of observations in the derivatives trading room of a major investment bank. We found that traders use models to translate stock prices into estimates of what their rivals think. Traders use these estimates to look out for possible errors in their own models. We found that this practice, reflexive modeling, enhances returns by turning prices into a vehicle for distributed cognition. But it also induces a dangerous form of cognitive interdependence: when enough traders overlook a key issue, their positions give misplaced reassurance to those traders that think similarly, disrupting their reflexive processes. In cases lacking diversity, dissonance thus gives way to resonance. Our analysis demonstrates how practices born in caution can lead to overconfidence and collective failure. We contribute to economic sociology by developing a socio-technical account that grapples with the new forms of sociality introduced by financial models -dissembedded yet entangled; anonymous yet collective; impersonal yet, nevertheless, emphatically social. 2 From Dissonance to ResonanceThe Risk of Resonance: Cognitive Interdependence in Quantitative FinanceAs the term "financial engineer" suggests, the recent history of finance is part of the broader rise in systems engineering over the last half of the 20 th Century.Models, computers, and electronics have reshaped Wall Street as much as the jet engine changed aviation. Whether in industrial engineering or in financial engineering, the new tools of practice have proven faster, bolder, and more complex, opening up the scope for gains in speed, efficiency, and power. But they have also opened up the possibility of disasters. Indeed, it is no coincidence that a new body of expertise, cybernetics, was developed to deal with the complexities of advanced technological systems in the age of machine intelligence. Writing in the aftermath of one of the most automated (and lethal) wars to date, Weiner (1948), McCulloch andPitts (1943) andVon Foerster (1958) laid out the principles for the governance of systems marked by interdependencies and positive feedback. But whereas these concerns arguably helped system engineers limit (though not eliminate) the dangers of nuclear accidents or massive air traffic fatalities, the equivalent has not yet been developed for financial engineering. "Systemic risk," "circuit breakers," and related expressions populate the day-to-day parlance of regulators, but existing theories of the market do not explicitly focus on the interdependencies caused by financial modeling.Positive feedback, tight coupling, or lock-in hang menacingly over the portfolios of investors. As the credit crisis of 2008 comes to show, the large technological systems at the core of the industrial economy may be better prepared for the risks of complex engineering than modern finance. way that allows market participants to think collectively about the issue.Our study further demonstrates t...

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“…Following the literature on M&A (for example, Hsieh and Walkling 2005), we further exclude any transaction classified by SDC as a divestiture, spinoff, or repurchase, because these are typically deemed to be non-M&A activities. These criteria result in a sample of 1,566 appraisal-eligible deals.…”

Section: The Sample Of Mergers and Acquisitionsmentioning

confidence: 99%

Appraisal: Shareholder Remedy or Litigation Arbitrage?

Jiang¹,

Mei

et al. 2016

SSRN Journal

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We present the first large-sample empirical study of the recent trends in the appraisal remedy-the right of shareholders of companies completing an eligible merger to petition the court for an improved price for their shares. Appraisal petitions have increased markedly over our sample from 2000 to 2014, and the composition of those bringing these suits has shifted from individual shareholders toward specialized hedge funds. Appraisal petitions are more likely to be filed against mergers with perceived conflicts of interest, including going-private deals, minority squeeze outs, and acquisitions with low premiums, which makes them a potentially important governance mechanism. Appraisals yield sizable excess returns to the petitioners, with an average annualized return of 32.9 percent, which suggests that appraisals also act as a litigation arbitrage. Finally, we explore the likely effects of two recent changes to the Delaware appraisal statute-regarding the minimum stake and interest payment-on the incentives to file appraisal petitions.

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Determinants and implications of arbitrage holdings in acquisitions

Cited by 62 publications

References 28 publications

Influencing Control: Jawboning in Risk Arbitrage

Influencing Control: Jawboning in Risk Arbitrage

From Dissonance to Resonance: Cognitive Interdependence in Quantitative Finance

Appraisal: Shareholder Remedy or Litigation Arbitrage?

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