Merger Arbitrage in Germany
Ian McDermott and
Journal of Finance and Investment Analysis, 2017, vol. 6, issue 2, 2
This paper analyses the risk and return characteristics from a merger arbitrageÂ trading strategy in Germany for the first time. The extant literature focusesÂ mainly on data sets from Anglo-American based jurisdictions with mixed results.Â We argue that because in Germany i) acquisition laws bias consideration towardÂ cash bids thereby decreasing the uncertainty of announced transactions (versusÂ share offers) and ii) the Aufsichstrat (supervisory board with employeeÂ participation) has corporate governance oversight over any proposed merger suchÂ that only bids tacitly approved by it are likely to be announced in the first instance,Â a merger arbitrage trading strategy in a German setting will have different risk andÂ return characteristics. To estimate the significance of merger arbitrage returnsÂ we construct a realistic measure of risk arbitrage which factors in transaction costsÂ and other practical limitations encountered by arbitrageurs employing this strategy.Â We also construct two additional portfolios, an equally-weighted portfolio and aÂ value weighted portfolio, for comparison purposes. The results show that theÂ practical risk arbitrage manager portfolio fails to outperform on a risk-adjustedÂ basis indicating that insofar as the German setting yields benefits in the form ofÂ lower risk, these are properly priced by the market.JEL classification numbers: G11, G15, G34Keywords: Merger arbitrage, Germany, abnormal returns, practical limitations
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