Discussion paper

DP2026 Risk Arbitrage in Takeovers

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.


Cornelli, F and D Li (1998), ‘DP2026 Risk Arbitrage in Takeovers‘, CEPR Discussion Paper No. 2026. CEPR Press, Paris & London. https://cepr.org/publications/dp2026