The profitability of merger arbitrage: some Australian evidence

• Published in: Australian journal of management Vol. 30; no. 1; pp. 111 - 126
• Main Authors: Maheswaran, Krishnan, Yeoh, Soon Chin
• Format: Journal Article
• Language: English
• Published: London, England SAGE Publications 01.06.2005; Sage Publications Ltd
• Subjects: Acquisitions & mergers; Arbitrage; Bids; Investment; Investment policy; Investments; Market prices; Mathematical models; Mergers; Profitability; Profits; Risk adjusted profitability; Risk arbitrage; Risk exposure; Securities industry; Shares; Stock exchanges; Studies; Success; Treasury bills; Australia; MERGERS AND ACQUISITIONS; MERGER ARBITRAGE; RISK ARBITRAGE
• ISSN: 0312-8962; 1327-2020
• DOI: 10.1177/031289620503000106

In this paper we examine the risk-adjusted profitability of merger arbitrage in Australia. Using a sample of 193 merger and acquisition bids from January 1991 to April 2000, we construct a time series of returns on equal and value-weighted merger arbitrage portfolios. Benchmarking the returns on the merger arbitrage portfolios against the CAPM and Fama and French (1993) three-factor models, we find that merger arbitrage generates statistically and economically significant excess risk-adjusted returns before transaction costs, ranging from 0.84% to 1.20% per month. However, after adjusting for transaction costs, the risk-adjusted returns are no longer statistically significant Further, in contrast to the United States, our evidence indicates that merger arbitrage in Australia is a market-neutral investment strategy. Indeed, the results from our estimations of the linear CAPM and Fama and French (1993) three-factor models suggest that merger arbitrage returns are not significantly sensitive to market-wide factors.