Risk Arbitrage in Takeovers

Cornelli, Francesca; Li, David D.

doi:10.1093/rfs/15.3.837

Cited by 98 publications

(100 citation statements)

References 21 publications

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“…The private data obtained from the proxy solicitation firm confirm the findings of Cornelli and Li [2002] that arbitrageurs hold significant positions in the target companies' stock. The authors note that risk arbitrage has received increased attention in the financial literature in recent years.…”

Section: Holdings In Takeover Transactions: Two Brief Case Studies Utsupporting

confidence: 71%

“…6 Private data obtained from the proxy solicitation firm. 7 Both Cornelli and Li [2002] and Baker and Savasoglu [2002] use 13F filings with the SEC to establish the level of arbitrage holdings to use in their studies. 8 The data from the survey that indicates an average portfolio size of over $150 million per risk arbitrageur.…”

Section: Endnotesmentioning

confidence: 99%

“…In addition, the lack of knowledge of the behavior of risk arbitrageurs has given rise to various debates in the literature. For example, several researchers (e.g., Cornelli and Li [2002]) have hypothesized that sizable positions held by arbitrageurs contribute to the positive abnormal returns of the takeover. On the other hand, Larcker and Lys [1987] hypothesize that arbitrageurs earn abnormal returns by being better informed than the market about the probability of each deal's success.…”

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confidence: 99%

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The Behavior of Risk Arbitrageurs in Mergers and Acquisitions

Moore

Lai

Oppenheimer

2006

JAI

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T he focus on risk arbitrage in the finance literature has increased in recent years. The major issues have been the profitability of the risk arbitrage strategy, the relationship between the success of takeovers and the positions held by arbitrageurs, the supply of arbitrage capital and the overall role of arbitrageurs in the takeover process. To examine these issues or draw conclusions effectively, researchers need to understand the behavior of risk arbitrageurs.This article seeks to provide specific information about the role and behavior of risk arbitrageurs. This information can be used to examine the validity of some assumptions in the current literature and aid researchers in making valid assumptions in their future research.Until recently, very little has been known about the role of arbitrageurs and the inner workings of the risk arbitrage decision process. Therefore researchers have made various assumptions related to the role and behavior of risk arbitrageurs. For example, Mitchell and Pulvino [2001] made various assumptions about position limits and restrictions on the capital of arbitrageurs. In addition, the lack of knowledge of the behavior of risk arbitrageurs has given rise to various debates in the literature. For example, several researchers (e.g., Cornelli and Li [2002]) have hypothesized that sizable positions held by arbitrageurs contribute to the positive abnormal returns of the takeover. On the other hand, Larcker and Lys [1987] hypothesize that arbitrageurs earn abnormal returns by being better informed than the market about the probability of each deal's success. The results presented in this article will provide researchers with information on the activity of risk arbitrageurs in the marketplace. These results should help clarify a number of matters relevant to the topic.This article explores two related issues. First, the authors obtain private information on arbitrageur holdings in two takeover transactions from recent years. Most prior research has approximated the holdings of arbitrageurs by examining filings at the Securities and Exchange Commission (SEC). The authors obtain this data from a leading proxy solicitation firm. Second, in order to gain a better understanding of the process of arbitrage and the behavior of risk arbitrageurs, the authors report the results of a survey of a significant group of active arbitrageurs. The survey results provide insights on the risk arbitrageur activities during the merger/acquisition process.The article makes four contributions. First, the results provide the evidence about how quickly arbitrageurs become involved in the trading in securities involved in takeovers. Previous published research has made assumptions as to the speed of involvement of the risk arbitrage community.Second, the authors explore in the survey how arbitrageurs structure their portfolios and how they control risk within these portfolios.

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Section: Holdings In Takeover Transactions: Two Brief Case Studies Utsupporting

confidence: 71%

Section: Endnotesmentioning

confidence: 99%

mentioning

confidence: 99%

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The Behavior of Risk Arbitrageurs in Mergers and Acquisitions

Moore

Lai

Oppenheimer

2006

JAI

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“…Another explanation proposed by Cornelli and Li (2002) is that merger arbitrageurs have an informational advantage relative to target shareholders because arbitrageurs, hiding among noise traders, know that they bought shares. The good performance of merger arbitrage has also been attributed to hedge funds' better management of downside risk (Cao et al (2014)), to investors underre-6 acting to the passage of time after the merger announcement (Giglio and Shue (2014)), or to probability weighting (Wang (2014)).…”

Section: Related Literaturementioning

confidence: 99%

Financial Media, Price Discovery, and Merger Arbitrage

Buehlmaier

Zechner

2017

SSRN Journal

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“…It is well known that the free-rider problem in tender offers can result with inefficiencies and deter bidders from approaching targets (Grossman and Hart (1980) 21 Air Products won a proxy fight in which it successfully appointed 3 directors to the board of Airgas. Although these 3 directors were nominated by Air Products, they turned against Air Products (claiming the takeover offer was too low) and helped Airgas's management to block the takeover.…”

Section: Proxy Fight Combined With a Tender Offermentioning

confidence: 99%

Corporate Control Activism

Corum

Levit

2015

SSRN Journal

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We identify a commitment problem that prevents bidders from unseating resisting and entrenched incumbent directors of target companies through proxy fights. We discuss potential remedies and argue that activist investors are more resilient to this commitment problem and can mitigate the resulting inefficiencies by putting such companies into play. This result holds even if bidders and activists have similar expertise and can use similar techniques to challenge the incumbents, and it is consistent with the evidence that most proxy fights are launched by activists, not by bidders. Building on this insight, we study the implications of activist interventions on the M&A market. AbstractWe identify a commitment problem that prevents bidders from unseating resisting and entrenched incumbent directors of target companies through proxy fights. We discuss potential remedies and argue that activist investors are more resilient to this commitment problem and can mitigate the resulting inefficiencies by putting such companies into play.This result holds even if bidders and activists have similar expertise and can use similar techniques to challenge the incumbents, and it is consistent with the evidence that most proxy fights are launched by activists, not by bidders. Building on this insight, we study the implications of activist interventions on the M&A market.

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Risk Arbitrage in Takeovers

Cited by 98 publications

References 21 publications

The Behavior of Risk Arbitrageurs in Mergers and Acquisitions

The Behavior of Risk Arbitrageurs in Mergers and Acquisitions

Financial Media, Price Discovery, and Merger Arbitrage

Corporate Control Activism

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