Working Paper: CEPR ID: DP2026
Authors: Francesca Cornelli; David Li
Abstract: The paper studies the role of risk arbitrage in takeover contests. We show that arbitrageurs have an incentive to accumulate non-trivial stakes in a company target of a takeover. For each arbitrageur, the knowledge of his own presence (and that he will tender a positive fraction of his shares) is an informational advantage which guarantees that there is a scope for trade with the other shareholders. In equilibrium, the number of arbitrageurs buying shares and the number of shares they buy are determined endogenously. The paper also presents a range of empirical implications, including the relationship between trading volume, takeover premium, bidder's toehold, liquidity of the shares and the probability that the takeover will succeed.
Keywords: mergers; corporate control; arbitrage
JEL Codes: D82; G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| presence of risk arbitrageurs (G34) | probability of a successful takeover (G34) |
| increased trading volume (G15) | share price (G12) |
| share price (G12) | probability of a successful takeover (G34) |
| number of arbitrageurs (G19) | increased trading volume (G15) |
| presence of arbitrageurs (G19) | informational advantage (D83) |
| number of arbitrageurs (G19) | negative expected profits for arbitrageurs (G19) |