Merger Arbitrage Profitability in China

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