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UK Evidence on the Profitability and the Risk-Return Characteristics of Merger Arbitrage

46 Pages Posted: 18 Jan 2009  

Puliyur Sudarsanam

Cranfield University - School of Management

Dzung V. Nguyen

Cranfield School of Management

Date Written: December 2008

Abstract

On a sample of 1105 UK cash and stock mergers over the period of 1987-2007, this study is the first to provide empirical evidence about the profitability and the risk-return characteristic of the merger arbitrage strategy in the UK market. Consistent with the findings in other markets, the UK merger arbitrage portfolios are profitable on risk-adjusted basis. The result is robust to a range of methods to control for risk. The most important contribution of this study is to show how takeover regulations can affect the risk-return characteristics of the merger arbitrage strategy. There is little evidence that the UK merger arbitrage portfolios exhibit any non-linear risk-return pattern. The finding is in line with restrictions imposed by the UK Takeover Code on the bidder's ability to renege on the bid. Combined with the US and Australian evidence under varying degree of such restrictions in these respective jurisdictions, the regulation impact is confirmed.

Keywords: Merger arbitrage, risk arbitrage, profitability, risk, return, market efficiency, UK market

JEL Classification: G10,G11

Suggested Citation

Sudarsanam, Puliyur and Nguyen, Dzung V., UK Evidence on the Profitability and the Risk-Return Characteristics of Merger Arbitrage (December 2008). Available at SSRN: https://ssrn.com/abstract=1108477 or http://dx.doi.org/10.2139/ssrn.1108477

Puliyur Sudi Sudarsanam

Cranfield University - School of Management ( email )

Bedfordshire, MK43 0AL
United Kingdom

Dung Viet Nguyen (Contact Author)

Cranfield School of Management ( email )

Bedfordshire, MK43 0AL
United Kingdom

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