Citation

Discussion Paper Details

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Title: Risk Arbitrage in Takeovers

Author(s): Francesca Cornelli and David Daokui Li

Publication Date: November 1998

Keyword(s): Arbitrage, Corporate Control and Mergers

Programme Area(s): Financial Economics and Industrial Organization

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.

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Bibliographic Reference

Cornelli, F and Li, D. 1998. 'Risk Arbitrage in Takeovers'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=2026