The Behavior of Risk Arbitrageurs in Mergers and Acquisitions

Abstract

When takeover announcements are made, trading in the securities, involved in the transactions is dominated by the decisions and actions of risk arbitrageurs. Generally institutions and individuals liquidate their positions in the target company's securities in the marketplace while arbitrageurs buy the shares of the target company. The inner workings of the risk arbitrage decision process however, has not been sufficiently explored in the literature. This article, through a survey of arbitrageurs, explores insights into the thought process and decision making of risk arbitrageurs. The survey characterizes the rapid reactions of arbitrageurs to takeover announcements as well as their approach to trading and controlling risk within their portfolios. The results from the survey also provide insights into how arbitrageurs conduct their trading. While it is commonly believed that they use market orders, the survey finds that is rarely the case. The survey shows that arbitrageurs use limit orders instead to control the prices at which they buy and sell securities.