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Risk Arbitrage and the Prediction of Successful Corporate Takeovers

Keith C. Brown and Michael V. Raymond
Financial Management
Vol. 15, No. 3 (Autumn, 1986), pp. 54-63
Published by: Wiley on behalf of the Financial Management Association International
Stable URL: http://www.jstor.org/stable/3664844
Page Count: 10
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Since scans are not currently available to screen readers, please contact JSTOR User Support for access. We'll provide a PDF copy for your screen reader.
Risk Arbitrage and the Prediction of Successful Corporate Takeovers
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Abstract

As it is usually defined, risk arbitrage involves purchasing the stock of the target firm in a takeover attempt that has been publicly announced. Once the sole domain of the professional investor, merger and acquisition arbitrage has recently attracted a considerable amount of "outside" capital. A consequence of this increased speculative participation is that the post-announcement stock prices of the merging firms reflect the market's consensus prediction that the venture will ultimately be successful. This paper presents a simple technique based on the mechanics of the risk arbitrage process for estimating the probability of a successful corporate takeover. Empirical evidence is provided to support the conclusion that the market can meaningfully discriminate between those merger proposals that will be completed and those that will eventually fail far in advance of the actual outcome.

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