Merger Arbitrage Profitability in China

International Conference on Management Science and Engineering, Press of Harbin Institute of Technology, 1995

6 Pages Posted: 11 Jun 2007

See all articles by Jason Tuan

Jason Tuan

School of Economics and Management of Beijing Jiaotong University

Jason C. Hsu

Rayliant Global Advisors; Research Affiliates, LLC; University of California, Los Angeles - Anderson School of Business

Jinxin Zhang

Beijing Jiaotong University - School of Economics and Management

Zhang Qiusheng

Beijing Jiaotong University - School of Economics and Management

Abstract

This paper examines the profitability of merger arbitrage strategies in China. Additionally, it examines the presence of insider trading in the target company, prior to the announcement of the M&A offer, in the Chinese stock market. Using a sample of 22 tender offer bids (from January 2002 to December 2006) and applying standard event study methodology, we find that the average cumulative abnormal return (CAR) from a portfolio, which purchases long the target firm is significant at positive 17.7%, for voluntary tender offers (from day -30 to the announcement day 0). However, the average CAR form day 0 to the resolution day is significant at negative -4.14%. For mandatory tender offer, both the pre- and post-announcement average CAR are not statistically significant. These results suggest that there is no opportunity for investors to profit from a post-announcement long only strategy. In addition, the significant pre-announcement price appreciation followed by post-announcement negative return suggests insider trading. Finally, the pattern of CAR for mandatory tender offers is different from that for voluntary offers, where the mandatory tender offer events have no impact on the share price of target firm.

Keywords: Merger Arbitrage, Risk Arbitrage, Insider Trading, Pre-Bid Price Appreciation, Merger and Acquisition, Standard Event Study Methodology

Suggested Citation

Tuan, Jason and Hsu, Jason C. and Zhang, Jinxin and Qiusheng, Zhang, Merger Arbitrage Profitability in China. International Conference on Management Science and Engineering, Press of Harbin Institute of Technology, 1995 . Available at SSRN: https://ssrn.com/abstract=992650

Jason Tuan (Contact Author)

School of Economics and Management of Beijing Jiaotong University ( email )

No.3 of Shangyuan Residence Haidian District
Beijing, 100089
China

Jason C. Hsu

Rayliant Global Advisors ( email )

Hong Kong

Research Affiliates, LLC ( email )

620 Newport Center Dr
Suite 900
Newport Beach, CA 92660
United States

HOME PAGE: http://www.jasonhsu.org

University of California, Los Angeles - Anderson School of Business

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Jinxin Zhang

Beijing Jiaotong University - School of Economics and Management ( email )

China

Zhang Qiusheng

Beijing Jiaotong University - School of Economics and Management

China

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