Limited Arbitrage in Mergers and Acquisitions

Posted: 15 Jul 2002 Last revised: 13 Jan 2009

See all articles by Malcolm P. Baker

Malcolm P. Baker

Harvard Business School; National Bureau of Economic Research (NBER)

Serkan Savasoglu

Morgan Stanley

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A diversified portfolio of risk arbitrage positions produces an abnormal return of 0.6% to 0.9% per month over the period from 1981 to 1996. We trace these profits to practical limits on risk arbitrage. In our model of risk arbitrage, arbitrageurs' risk-bearing capacity is constrained by deal completion risk and the size of the position they hold. Consistent with this model, we document that the returns to risk arbitrage increase in an ex ante measure of completion risk and target size. We also examine the influence of the general supply of arbitrage capital, measured by the total equity holdings of arbitrageurs, on arbitrage profits.

Keywords: Arbitrage, Mergers and acquisitions, Market Efficiency

JEL Classification: G14 G23 G34

Suggested Citation

Baker, Malcolm P. and Savasoglu, Serkan, Limited Arbitrage in Mergers and Acquisitions. Journal of Financial Economics, Vol. 64, No. 1, pp. 91-116, April 2002, Available at SSRN:

Malcolm P. Baker (Contact Author)

Harvard Business School ( email )

Boston, MA 02163
United States
617-495-6566 (Phone)


National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Serkan Savasoglu

Morgan Stanley ( email )

1585 Broadway
New York, NY 10036
United States

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