Risk Arbitrage in Takeovers

Francesca Cornelli and David Daokui Li

No 2026, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: The paper studies the role of risk arbitrage in takeover contests. We show that arbitrageurs have an incentive to accumulate non-trivial stakes in a company target of a takeover. For each arbitrageur, the knowledge of his own presence (and that he will tender a positive fraction of his shares) is an informational advantage which guarantees that there is a scope for trade with the other shareholders. In equilibrium, the number of arbitrageurs buying shares and the number of shares they buy are determined endogenously. The paper also presents a range of empirical implications, including the relationship between trading volume, takeover premium, bidder's toehold, liquidity of the shares and the probability that the takeover will succeed.

Keywords: Arbitrage; Corporate Control; Mergers (search for similar items in EconPapers)
JEL-codes: D82 G34 (search for similar items in EconPapers)
Date: 1998-11
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