Market Risk Exposure of Merger Arbitrage in Australia

Accounting and Finance, Forthcoming

42 Pages Posted: 26 Nov 2008 Last revised: 13 Oct 2011

See all articles by Jason Hall

Jason Hall

University of Michigan, Stephen M. Ross School of Business

Matt Pinnuck

University of Melbourne - Department of Accounting and Business Information Systems

Matthew Thorne

University of Queensland - Business School

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Date Written: October 6, 2011

Abstract

We investigate the risk-return characteristics of merger arbitrage in the Australian market for corporate control, whereby hedge fund managers acquire companies subject to a takeover offer. On average, a strategy of buying target companies and short-selling bidders making scrip offers would have generated an annual return of 30 per cent from 1985-2008, excluding transaction costs, compared to the return on the broader market of 12 per cent. However, performance is not market neutral, being positively associated with market returns during downturns and inversely related to market movements during rising markets. The payoffs to this strategy are analogous to a short straddle, whereby the investor is short a call and put option at the same exercise price. These results are consistent with large-sample evidence from the United States and the United Kingdom and have not previously been documented in Australia, in which prior evidence is based only on cash deals during the 1990’s.

Keywords: Merger arbitrage, risk arbitrage, mergers and acquisitions

JEL Classification: G11

Suggested Citation

Hall, Jason L. and Pinnuck, Matthew and Thorne, Matthew, Market Risk Exposure of Merger Arbitrage in Australia (October 6, 2011). Accounting and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1307383

Jason L. Hall (Contact Author)

University of Michigan, Stephen M. Ross School of Business ( email )

701 Tappan Street, Ross School of Business
University of Michigan
ANN ARBOR, MI MI 48104
United States
+1 734 926 6989 (Phone)

Matthew Pinnuck

University of Melbourne - Department of Accounting and Business Information Systems ( email )

Victoria
Melbourne, Victoria 3010 3010
Australia

Matthew Thorne

University of Queensland - Business School ( email )

Brisbane, Queensland 4072
Australia

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