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Rev Fin 2002; 15:837-868
© 2002 the Society for Financial Studies

Risk Arbitrage in Takeovers

Francesca Cornelli
Francesca Cornelli, Duke University, London Business School, and CEPR

David D. Li
David D. Li, Hong Kong University of Science and Technology and CEPR

Address correspondence to Francesca Cornelli, London Business School, Sussex Place, Regent's Park, London NW1 4SA, U.K., or e-mail: fcornelli{at}london.edu

Abstract

This article studies the role of risk arbitrageurs in takeovers and the source of their advantage. We show how the presence of arbitrageurs affects the value of the target shares, since arbitrageurs are more likely to tender. Therefore an arbitrageur has the informational advantage of knowing he bought shares. In equilibrium, the number of arbitrageurs buying shares and the price they pay are determined endogenously. We also present several empirical implications, including the relationship among trading volume, takeover premium, liquidity of the shares, and the number of risk arbitrageurs investing in one particular deal.


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