Merger Arbitrage and the Interaction between Target and Bidder Stocks during Takeover Bids

Kearney, C; Hutson, ER

Merger Arbitrage and the Interaction between Target and Bidder Stocks during Takeover Bids

Kearney, C Hutson, ER

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Publisher:: Elsevier
Publication Type:: Journal Article
Citation:: Research in International Business and Finance, 2005, 19 (1), pp. 1 - 26
Issue Date:: 2005-01

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Field	Value	Language
dc.contributor.author	Kearney, C	en_US
dc.contributor.author	Hutson, ER	en_US
dc.date.issued	2005-01	en_US
dc.identifier.citation	Research in International Business and Finance, 2005, 19 (1), pp. 1 - 26	en_US
dc.identifier.issn	0275-5319	en_US
dc.identifier.uri	http://hdl.handle.net/10453/15809
dc.description.abstract	We use bivariate ARCH specifications to model the conditional mean and stock price volatility for 56 takeover bids from January 1985 and July 1994. Using daily data from one year prior to the takeover announcement until the conclusion of the bid, we allow for two-way interaction in both moments between the bidding and the target companies. We find a significant departure from relation to the market for target stocks after a takeover announcement, but not for bidders. These results have implications for merger arbitrage, and we suggest a technique for controlling for differential betas in the merger arbitrage portfolio. Interaction between bidder and target stocks is strong for stock-swap and mixed cases, where the bid price is transferred from bidder to target. But we also find some interaction in cash bids, and from target to bidder in stock-swap takeovers. We argue that this can be explained by both bidder and target reflecting the likelihood of success of the takeover offer.	en_US
dc.publisher	Elsevier	en_US
dc.relation	http://purl.org/au-research/grants/arc/A79801963
dc.relation.ispartof	Research in International Business and Finance	en_US
dc.subject.classification	Finance	en_US
dc.title	Merger Arbitrage and the Interaction between Target and Bidder Stocks during Takeover Bids	en_US
dc.type	Journal Article
utslib.citation.volume	1	en_US
utslib.citation.volume	19	en_US
utslib.for	1502 Banking, Finance and Investment	en_US
pubs.embargo.period	Not known	en_US
pubs.organisational-group	/University of Technology Sydney
pubs.organisational-group	/University of Technology Sydney/Faculty of Business
utslib.copyright.status	closed_access
pubs.consider-herdc	false	en_US
pubs.issue	1	en_US
pubs.volume	19	en_US

Abstract:

We use bivariate ARCH specifications to model the conditional mean and stock price volatility for 56 takeover bids from January 1985 and July 1994. Using daily data from one year prior to the takeover announcement until the conclusion of the bid, we allow for two-way interaction in both moments between the bidding and the target companies. We find a significant departure from relation to the market for target stocks after a takeover announcement, but not for bidders. These results have implications for merger arbitrage, and we suggest a technique for controlling for differential betas in the merger arbitrage portfolio. Interaction between bidder and target stocks is strong for stock-swap and mixed cases, where the bid price is transferred from bidder to target. But we also find some interaction in cash bids, and from target to bidder in stock-swap takeovers. We argue that this can be explained by both bidder and target reflecting the likelihood of success of the takeover offer.

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http://hdl.handle.net/10453/15809