The Profitability of Merger Arbitrage: Some Australian Evidence

Krishnan Maheswaran and Soon Chin Yeoh
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Krishnan Maheswaran: Department of Finance, University of Melbourne, The University of Melbourne, Parkville, 3010.
Soon Chin Yeoh: Department of Finance, University of Melbourne, The University of Melbourne, Parkville, 3010.

Australian Journal of Management, 2005, vol. 30, issue 1, 111-126

Abstract: In this paper we examine the risk-adjusted profitability of merger arbitrage in Australia. Using a sample of 193 merger and acquisition bids from January 1991 to April 2000, we construct a time series of returns on equal and value-weighted merger arbitrage portfolios. Benchmarking the returns on the merger arbitrage portfolios against the CAPM and Fama and French (1993) three-factor models, we find that merger arbitrage generates statistically and economically significant excess risk-adjusted returns before transaction costs, ranging from 0.84% to 1.20% per month. However, after adjusting for transaction costs, the risk-adjusted returns are no longer statistically significant Further, in contrast to the United States, our evidence indicates that merger arbitrage in Australia is a market-neutral investment strategy. Indeed, the results from our estimations of the linear CAPM and Fama and French (1993) three-factor models suggest that merger arbitrage returns are not significantly sensitive to market-wide factors.

Keywords: MERGERS AND ACQUISITIONS; MERGER ARBITRAGE; RISK ARBITRAGE (search for similar items in EconPapers)
Date: 2005
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Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:sae:ausman:v:30:y:2005:i:1:p:111-126

DOI: 10.1177/031289620503000106

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