Risk Arbitrage in Takeovers

Rodney L. White Center Working Paper No. 17-98

Posted: 13 Aug 1998

See all articles by Francesca Cornelli

Francesca Cornelli

London Business School; Centre for Economic Policy Research (CEPR)

David D. Li

Hong Kong University of Science & Technology (HKUST) - Department of Economics

Date Written: June 1998

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.

JEL Classification: G34, D82

Suggested Citation

Cornelli, Francesca and Li, David Daokui, Risk Arbitrage in Takeovers (June 1998). Rodney L. White Center Working Paper No. 17-98, Available at SSRN: https://ssrn.com/abstract=106708

Francesca Cornelli (Contact Author)

London Business School ( email )

Sussex Place
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London, London NW1 4SA
United Kingdom
+44 20 7262 5050 x3225 (Phone)
+44 20 7724 3317 (Fax)

HOME PAGE: http://www.lbs.ac.uk/faculty/fcornelli/

Centre for Economic Policy Research (CEPR)

London
United Kingdom

David Daokui Li

Hong Kong University of Science & Technology (HKUST) - Department of Economics ( email )

Clear Water Bay
Kowloon, Hong Kong
China
(852) 2358-7610 (Phone)
(852) 2358-2084 (Fax)

HOME PAGE: http://home.ust.hk/~davidli

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