Simultaneous Analyst Coverage and the Reduction of the Risk-Arb Spread

Abstract

Research on mergers and hedge funds find that the risk arbitrage spread has contracted. This paper investigates the role financial analysts have on risk arbitrage by comparing mergers where a single analyst covers both the target and the acquirer prior to the deal announcement. We find that simultaneous coverage increases as a percent of M&A deals and that deals with simultaneous analyst coverage have a lower risk-arb spread. We additionally find that these deals have a lower takeover premium and longer time to completion. Overall, results suggest that simultaneous analyst coverage has reduced the risk-arb spread.

Keywords: analysts, risk arbitrage, mergers, market efficiency, hedge funds

JEL Classification: G10, G14, G34, M41