Determinants and Implications of Arbitrage Holdings in Acquisitions

59 Pages Posted: 3 Aug 2004

See all articles by Jim Hsieh

Jim Hsieh

George Mason University

Ralph A. Walkling

Drexel University - Lebow College of Business

Date Written: May 4, 2004


This study investigates arbitrage activities and their impact on acquisitions. The literature contains arguments for both passive and active roles of arbitrageurs during the takeover process. Larcker and Lys (1987) suggest that arbitrageurs are passive, having superior ability to predict offer success. Cornelli and Li (2002) and Gomes (2001) model arbitrageurs as active, influencing the terms and outcome of offers. We find evidence supporting both arguments. Using a simultaneous-equations framework to recognize endogeneity, we analyze 608 acquisition bids over the 1992-1999 period. Consistent with the passive arbitrage argument, the change in arbitrage holdings is greater in successful offers. However, changes in arbitrage holdings are also shown to be an important determinant of the probability of success, bid premia, and arbitrage returns. In addition, the change in arbitrage holdings is positively associated with both revision returns and the occurrence of subsequent bids within one year after initial bids are terminated. Overall, we find that merger arbitrageurs play an important role in the market for corporate control.

Keywords: mergers, arbitrage, market for corporate control

JEL Classification: G34, G14, D82

Suggested Citation

Hsieh, Jim and Walkling, Ralph August, Determinants and Implications of Arbitrage Holdings in Acquisitions (May 4, 2004). Tuck Contemporary Corporate Finance Issues III Conference Paper; Dice Center Working Paper No. 2003-14. Available at SSRN: or

Jim Hsieh (Contact Author)

George Mason University ( email )

4400 University Dr, MSN 5F5
George Mason University
Fairfax, VA 22030
United States

Ralph August Walkling

Drexel University - Lebow College of Business ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
(215) 895-4920 (Phone)
(215) 895-6119 (Fax)

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