Risk arbitrage in takeovers

Cornelli, F and Li, D D (1998) Risk arbitrage in takeovers. Working Paper. London Business School IFA Working Paper.

Abstract

The paper studies the role of risk arbitrage in takeover contests. We show that arbitrageurs have an incentive to accumulate nontrivial 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.