Merger Arbitrage Research Articles

The Best Investing Strategy for Beginners

More and more people are getting into the investment industry, which is not an easy job for some beginners. Complicated strategies and varied portfolios can often feel overwhelming and also lead investors into one misunderstanding after another. In order to reduce the hassle of investing, this article will pick the four most common and easy-to-understand strategies: momentum investing, comparing PEG ratios, merger arbitrage strategy, and market-neutral trade. From a version of beginner on how to start an investment portfolio. The background of the eight films selected in this paper will be introduced first, mainly about what the film does. Moreover, the uses of the strategy will be present, as the theory behind them. Then, this paper will present detailed progress, including stock price tendency, results, and future improvements. The calculation of PEG ratios and market-neutral strategy will also be included. Finally, a comparison is also made in this paper, which can deliver the feasibility of each strategy base on the four pairs of trades made. It also introduces how a manager new to stocks makes a decision and the results obtained and sums up a strategy that is most suitable for beginners to invest. However, it is just a brief explanation; different investment portfolios need to use different investment strategies and try more to get more returns.

The application of feed forward neural networks to merger arbitrage: A return-based analysis

This study examines the effectiveness and applicability of a trending machine learning algorithm, the feed forward neural networks (FFNNs) in making merger arbitrage investment decisions. Using a sample of attempted takeovers, 24 deal-specific, target-specific, and macroeconomic factors serve as input variables for the proposed FFNNs model. The resulting failure probabilities are utilized by a simulated hedge fund in evaluating merger arbitrage opportunities. By comparing other funds employing simplistic or commonplace predictive models and investment decision rules, our findings reveal the power of machine learning in takeover failure prediction and the use of FFNN can increase risk-standardized deal returns on average.

시간가변 전이효과를 고려한 글로벌 대체투자 자산들의 변동성 파급경로에 관한 연구

In this study, volatility spillover was analyzed based on the Time Varying Parameter VAR(Vector Autoregressive) model to identify the volatility transmission mechanism of alternative assets for the S&P Global Infrastructure Index, S&P Merger Arbitrage Index, and S&P U.S. SPAC Index.
 The results of the empirical analysis over the sample period are as follows: First, the total connectedness of the indices to be analyzed was estimated to be 27.22%, and the volatility spillover between the S&P500 and the Global Infrastructure Index was found to be quite high, whereas the index with the least connectedness to the S&P500 index was found to be the U.S. SPAC Index. Second, according to the net bidirectional connectedness estimation results, the most affected index was reported as the Merger Arbitrage Index, and the most affected index was reported as the Global Infrastructure Index. In addition, the U.S. SPAC Index was relatively neutral, confirming the possibility of contributing greatly to the portfolio diversification effect. Third, the total connectedness of the indices showed a behavior of rapidly increasing and then decreasing again at the time of the global spread of the coronavirus, but different movements were observed for each index, and the SPAC Index reacted more sensitively than other indexes.

Hedge Fund Strategies Performance in Bad Market Condition Analysis

In this article, the performance of hedge fund strategies is measured and analyzed by the following aspects: potential risk of the strategies excepted return of selected hedge fund and the sample performance in pressured stock market conditions. The study will provide theoretical explanations of the efficacy of Merger Arbitrage, Mutual Fund strategies, and PE ratio-related hedge fund strategies and their profitability as well as risk tolerance. Throughout equity data collection, asset markets including the S&P and NASDAQ have experienced downward pressure on systemic risk caused by inflation combined with quantitative tightening. These Macro factors have significantly contributed to the effectiveness of hedge portfolios; therefore, the article will focus on the performance of hedge fund strategies in the current market and analyze the efficiency of the strategies. According to the real-time hedge strategy trading data obtained from May/21st/2022 to July/01/2022, the Market Mutual strategy, as well as the Merger arbitrage, displayed the risk-averse characteristics of the hedging strategy during the underperforming period. On the other hand, P/E-based trades took on more systematic risk, which generated additional losses than expected.

Novel alternative assets within a transmission mechanism of volatility spillovers: The role of SPACs

This study investigates the volatility spillovers between Special Purpose Acquisition Companies (SPACs) and a set of alternative instruments comprising traditional IPOs, merger arbitrage, hedge replication funds and equities, utilizing a time-varying spillover approach. Our empirical findings, based on high frequency dataset comprising 2,136 observations for the period 10/01/2020–06/08/2021, show that the level of volatility spillovers is moderate and consistent throughout the sample period. The SPAC market displays a relative neutral reaction within the channel of the diffused shocks, suggesting possible portfolio diversification gains for different types of investors.

Do hedge and merger arbitrage funds actually hedge? A time-varying volatility spillover approach

We examine the interaction between funds implementing hedge and merger arbitrage strategies and a set of traditional assets comprising equities, bonds, gold, crude oil, currency, commodities and real estate, by applying a time-varying spillover approach for the period 1/1/2010-7/31/2020. Results indicate that the funds absorb the fewest shocks from equities, crude oil, gold and currency compared to commodities, bonds and real estate. Furthermore, we test the effective hedging ability of these funds by estimating hedge ratios and optimal portfolio weights. Taking a short position in the volatility of the funds provides impeccable hedging effectiveness for all asset classes, except currency.

Financial Media, Price Discovery, and Merger Arbitrage*

Abstract Using merger announcements and applying methods from computational linguistics we find strong evidence that stock prices underreact to information in financial media. A one standard deviation increase in the media-implied probability of merger completion increases the subsequent 12-day return of a long-short merger strategy by 1.2 percentage points. Filtering out the 28% of announced deals with the lowest media-implied completion probability increases the annualized alpha from merger arbitrage by 9.3 percentage points. Our results are particularly pronounced when high-yield spreads are large and on days when only few merger deals are announced.

Asset Allocation Via Clustering or, Just How Useful Is My Stylebox? And Are Most Hedge Funds Really the Same?

In order to take advantage of the “one true free lunch” in investing, namely the increase in compound return due to the reduction of volatility by regular re-balancing among uncorrelated assets, it is necessary to first establish what those uncorrelated asset classes are. In practice, many investors are disappointed to find their attempts at “style-box” diversification (e.g. large vs. small, and growth vs. value) failed to provide much overall portfolio benefit in terms of this re-balancing effect. Machine-learning algorithms such as cluster identification via hierarchical trees have seen some success in identifying truer sector and industry classifications among individual equities; can such algorithms provide any insights as to the diversification benefits of standard asset classes? We apply various clustering algorithms to asset classes and hedge fund strategies from 1990 to the present to investigate cluster stability and compute the returns of a risk-parity investing approach. Some surprising insights emerge with actionable implications for portfolio construction (a few examples: there are three types of bonds; TIPS are not different; High Yield is mostly Equity; MLPs and Precious Metals are interesting; and all hedge funds except Merger Arbitrage and certain sub-categories of Macro have morphed over time into Equity).

A study on pairing arbitrage strategy of stock passive structured fund in China under extreme market conditions

Considering the factors such as arbitrage lag, transaction cost and overall discount or premium, this paper constructs the split and merger arbitrage models to investigate the pairing arbitrage strategy of stock passive structured fund in China under extreme market conditions. The empirical results mainly show that: (i) the actual success times of merger arbitrage is significantly higher than that of split arbitrage, indicating that the former is more likely to succeed than the latter. (ii) the actual yield of split arbitrage is higher than that of merger arbitrage, and the former is far more at risk than the latter.

Do Appraisal Challenges Benefit Target Shareholders Through Narrowing Arbitrage Spread?

There is an on-going debate regarding the extent to which the increased appraisal litigation in Delaware Chancery courts is beneficial from a public policy perspective. Boone et al. (2019) documents that, compared to deals without appraisal challenges, deals subject to appraisal challenges have 6% lower post-announcement arbitrage spread on average. Based on this observed gap in arbitrage spread, the authors claim that appraisal challenges benefit target shareholders through narrowing arbitrage spread. We find that the observed gap in arbitrage spread is driven by outliers and sampling biases. In fact, after controlling for these biases, the gap completely closes. Therefore, there is no evidence that target shareholders share the gains from merger arbitrage through narrowing arbitrage spread.

Competition, scale and hedge fund performance: Evidence from merger arbitrage

The study explores the impact of sector and individual fund’s size on performance. We demonstrate that alpha is related to demand for arbitrage capital as much as to its supply. Sector size affects alpha via price impact channel: larger scale depresses merger arbitrage spreads, thus lowering alpha. While we find that fund size has no impact on alpha, managerial skill has an economically significant impact of funds’ performance.

Stock Recalls As a Source of Informational Advantage Through Short Selling: Empirical Evidence from Mergers and Acquisitions

We apply the idea of Strych (2020) that short sellers of acquirers’ stocks infer from their private observations of stock recalls that the deal will be more likely terminated. To profit from such informational advantage through short selling, Strych (2020) expects that acquirers’ short sellers become merger arbitrageurs after deal announcement to obtain a trading option on acquirers’ stock recalls. The higher this trading option value, the more merger arbitrageurs are willing to pay for target shares than incumbent target shareholders require as premium from the acquirer. Anticipating this, we expect that acquirers reduce bid premiums accordingly. Consistently, in a sample of U.S. deal announcements from 2004 to 2017, we find that a one standard deviation increase of acquirers’ short interest (i.e., magnitude of merger arbitrage activity) and institutional ownership concentration (i.e., likelihood of an observable recall) is associated with a 10.53 percent decrease of the one-week premium. In addition, this premium reduction effect is accompanied with positive long-term buy-and-hold abnormal returns for acquirer stocks and tighter arbitrage spreads. As channel of the information about this premium reduction effect, we regard advice to acquirers by M&A advisors with high equity capital market expertise. As a result, M&A advisors add value to acquirers consistent with Dessaint, Eckbo, and Golubov (2019). Moreover, this effect is more pronounced for targets with low insider ownership and for acquirers with high active institutional ownership.

Anomalous Deal Return Capture: A Cross-Sectional Study of Three Hypothetical Global Merger Risk Arbitrage Portfolios 2000-2016

This paper examines the annual risks and returns of three disparate, hypothetical merger arbitrage portfolio strategies as an attempt to capture alpha from an in-sample study of 793 global M&A transactions covering the January 2000 thru December 2016 time period. Previously written and undoubtedly the most prominent literature into M&A and merger arbitrage [Schleifer & Vishny ‘97], [Mitchell & Pulvino ‘01] and [Baker & Savasoglu ‘02] focus on the limits of pure arbitrage the creation of such from noise/shock trading and the risk & return characteristics of a merger arbitrage trading strategy respectively. This paper by no means covers the universe of the arbitrage literature and touches only a fraction of arbitrage research – yet, this is the only paper I know of examining global merger arbitrage transactions and the construct of a long-only merger arbitrage strategy encompassing both US as well as non-US merger arbitrage deals and bench-marking the portfolios' risk and returns series against a non-U.S. benchmark. This study demonstrates that alpha can be added by purchasing target companies as part of a long-only global merger arbitrage strategy. Furthermore, above benchmark returns can be earned by also buying the targets of terminated deals. This study is less conclusive on the incremental value of purchasing the acquiring company's shares following a successful or terminated deal where stock is part of the deal consideration.

Investor Disagreement and Merger Outcomes

This paper examines how a target firm's trading volume, bid-ask spread, and stock return volatility respond over a two-week period to the announcement of M&A deals (nonprice reactions). I find that these variables are strongly correlated with changes in risk arbitrageurs' holdings surrounding the time of an announcement, whose ability to predict deal outcomes is often argued to be superior to that of other investors. I show that nonprice reactions predict deals that are more likely to be renegotiated, to feature slower completion times, and to fail even after controlling for merger arbitrage spreads and announcement returns. A trading strategy that involves investing in target firms with a low degree of failure risk, as predicted by nonprice reactions, yields positive abnormal returns. The presented results suggest that a target firm's volume, spread, and volatility after an M&A announcement reflect information about a deal's resolution not fully incorporated into stock prices and cast doubt on the notion that arbitrage spreads represent a deal's risk of failure as perceived by investors.

Financial Media, Price Discovery, and Merger Arbitrage

Using merger announcements and applying methods from computational linguistics we find strong evidence that stock prices underreact to information in financial media. A one standard deviation increase in the media-implied probability of merger completion increases the subsequent 12-day return of a long-short merger strategy by 1.2 percentage points. Filtering out the 28% of announced deals with the lowest media-implied completion probability increases the annualized alpha from merger arbitrage by 9.3 percentage points. Our results are particularly pronounced when high-yield spreads are large and on days when only few merger deals are announced. We also document that financial media information is orthogonal to announcement day returns.

Risk arbitrage in emerging Europe: are cross-border mergers and acquisition deals more risky?

Speculation spread in mergers and acquisitions (M&A), measured as the percentage difference between the offer price and the closing stock price of a target the day after the announcement, is the starting point for risk arbitrage returns, a topic receiving greater consideration both in practice and in the empirical literature. Reflecting the degree of risk in merger arbitrage investments, we found no significant difference between the speculation spread in domestic and foreign Polish deals, between 2000 and 2013. However, we found higher returns for cross-border portfolio, therefore investors seem more pessimistic with regards to the expected risk in cross-border deals. Also, on average, deal spreads do not correctly reflect the level of risk in merger arbitrage strategies with Polish targets.

Hedge Fund Indices: Performance and Comovement

The purpose of this paper is to examine the performance of different hedge fund investment strategies, with emphasis on the US financial crisis of 2007–2009. Additionally, the paper aims to examine the return comovement of hedge fund indices and the return comovement between hedge fund indices and equity indices. On evaluating the performance of 26 HFRI indices, the paper finds three hedge fund indices namely: ED: Merger Arbitrage Index, HFRI Relative Value (Total) Index and RV: Fixed Income-Asset Backed Index, which managed to beat the benchmark and the category during the pre-crisis period, crisis period and the post-crisis period. In light of US financial crisis, it finds that only four hedge fund indices recorded positive Sharpe ratios. Using coefficient of determination, the paper concludes that hedge fund indices do not have high return correlations with equity indices.

Regional equity market conditions and cross-border mergers and acquisitions (M & A)

Purpose – Do regional equity market conditions (bear market) affect the financial performance of firms involved in cross-border mergers and acquisitions (M & A)? If so, is there a clear difference between inward and outward M & A in selected regions? The author addresses these questions using a sample of cross-border M & A between 1990 and 2013 in three major geographical regions of the emerging markets: Brazil, Russia, India, and China (BRIC), Eastern Europe, and Africa. The author finds that regional equity market conditions – such as bear equity conditions – along with direction of the cross-border M & A (inward vs outward), and differences in economic fundamentals among these regions carry valuable information and have real effects on market reactions to the announcement of cross-border M & A transactions. The paper aims to discuss these issues. Design/methodology/approach – Using an empirical approach, the author takes a regional perspective, with emphasis on three regions (BRIC, Eastern Europe, and Africa), and aim to determine the impact of the state of the regional equity market (bear stock market), and direction and duration of the M & A on market reactions to the announcement of cross-border M & A. Findings – The author documents the impact of regional equity market conditions on the financial performance of firms involved in cross-border M & A. The author underlines that differences in economic fundamentals among regions carry valuable information and have real effects on the performance of target firms. Practical implications – On the one hand, merger arbitrage investors are keen to learn how to profit and position their investments accordingly during those periods. Therefore, this study has also put the limelight on the underlying factors that influence the market reaction around the M & A announcement at the regional level and clearly shows the additional benefits of regional market conditions, direction of the transactions, and the timing to highlight the positive gain of those equity investments regarding the emerging markets. On the other hand, as the purpose of the study is to delve into the market reactions to the M & A announcement while taking into consideration some relevant factors such as regional equity market conditions to assist companies’ managers and CEOs to effectively choose the right time. Social implications – By incorporating the result presented in this study, another “family” of mutual funds, beyond just the combination of risky assets and the riskless asset is being introduced. Those investment portfolios which take into account merger and/or any opportunistic strategies are tailored more to the needs of various clienteles. For assisting the analyst and portfolio manager, the intuitive character of the result makes it versatile and easy to use by investment firms as an additional decision tool. Originality/value – To the author knowledge, this is the first study that delves into the market performance of companies involved in cross-border M & A in the emerging markets by taking a regional perspective and aiming to determine the impact of the state of the regional equity market (bear stock market) on the M & A. It offers additional support to those institutional investors who are pursuing international diversification across various countries including emerging markets such that bear equity conditions (recessions in the regional stock markets) have an additional negative impact and a real effect on the performance of target firms.

Short Selling and Price Pressure Around Merger Announcements

Prior research argues that short selling by merger arbitrageurs adds downward pressure to the stock prices of acquiring firms, particularly for firms that use stock financing. We test this hypothesis by examining daily short sale data surrounding merger announcements. Our initial results show that short selling activity surges in response to merger announcements and that abnormal post-announcement short selling is driven by those mergers that use stock financing. This result is consistent, in part, with the presence of merger arbitrage. However, additional tests show that the negative post-announcement stock returns to acquiring firms are orthogonal to the level of post-announcement short selling activity. These findings extend the current literature by showing that, while post-announcement short selling is abnormally high, this short selling does not put undue pressure on acquiring firms’ stock prices.

Merger arbitrage short selling and price pressure

We evaluate the over-valuation hypothesis and merger arbitrage price pressure hypothesis as potential explanations for the observed negative returns to stock acquirers around merger announcement. Using daily shorting flow data, we show that the majority of the negative announcement returns can be attributed to price pressure induced by merger arbitrage short selling. Additional analysis of shorting activity and associated returns for floating-exchange-ratio stock acquirers at deal closings and among withdrawn stock deals further supports merger arbitrage price pressure explanation. We also find merger arbitrage activity increases with estimated arbitrage spread on a daily basis. As a whole, the results suggest that merger arbitrageurs play a critical role in stock mergers.