Risk Arbitrage and the Prediction of
Successful Corporate Takeovers
Keith C. Brown
Michael V. Raymond
Financial Management 15, 1986, pp. 54-63
As it is usually defined, risk arbitrage involves
purchasing the stock of the target firm in a takeover attempt that has been
publicly announced. Once
the sole domain of the professional investor, merger and acquisition arbitrage
has recently attracted a considerable amount of “outside” capital. A consequence of this increased speculative
participation is that the post-announcement stock prices of the merging firms
reflect the market’s consensus prediction that the venture will
ultimately be successful. This paper
presents a simple technique based on the mechanics of the risk arbitrage
process for estimating the probability of a successful corporate takeover. Empirical evidence is provided to support the
conclusion that the market can meaningfully discriminate between those merger
proposals that will be completed and those that will eventually fail far in
advance of the actual outcome.
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