Are Performance Based Arbitrage Effects Detectable? Evidence from Merger Arbitrage

35 Pages Posted: 19 May 2005 Last revised: 30 Jul 2008

See all articles by Micah S. Officer

Micah S. Officer

Loyola Marymount University - Department of Finance and Computer Information Systems

Abstract

This paper examines the predictions of the performance based arbitrage hypothesis for the merger arbitrage market. Performance based arbitrage (Shleifer and Vishny (1997)) is the notion that funds under management are withdrawn from arbitrageurs following trading losses, resulting in inefficient prices for securities subject to arbitrage trades. I examine general comovement in merger arbitrage spreads and the response of spreads to large arbitrage losses and substantial changes in deal flow. I find little evidence that merger arbitrage spreads exhibit systematic comovement or are substantially affected by important liquidity events in this market.

Keywords: Performance based arbitrage, merger arbitrage, arbitrage losses

JEL Classification: G34, G12, G14

Suggested Citation

Officer, Micah S., Are Performance Based Arbitrage Effects Detectable? Evidence from Merger Arbitrage. Journal of Corporate Finance, Vol. 15, No. 5, pp. 793-812. Available at SSRN: https://ssrn.com/abstract=725322

Micah S. Officer (Contact Author)

Loyola Marymount University - Department of Finance and Computer Information Systems ( email )

Los Angeles, CA 90045
United States

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