Abstract
This article explores the cross sectional variation in risk arbitrage spreads. Factors that are relevant to the probability of deal success (i.e., target termination fees, target resistance, target price run-up, relative size of the target, and arbitrageurs' activity), bid revision (i.e., target's growth opportunity), potential loss when a deal fails (i.e., bid premium and bidder's systematic risk) and transaction costs for risk arbitrageurs (i.e., bidder's return volatility and low priced shares) are found to be significant in developing a prediction model for risk arbitrage spreads. Risk arbitrage portfolios are created by comparing predicted arbitrage spreads with actual arbitrage spreads. The results show that deals whose actual spreads exceed the predicted spreads tend to be more attractive investments. The model may be used by risk arbitrageurs to identify attractive risk arbitrage opportunities.
- © 2008 Pageant Media Ltd
Don’t have access? Click here to request a demo
Alternatively, Call a member of the team to discuss membership options
US and Overseas: +1 646-931-9045
UK: 0207 139 1600