AJM - Abstracts

Volume 30 Number 1 June 2005

The Profitability of Merger Arbitrage: Some Australian Evidence

Krishnan Maheswaran and Soon Chin Yeoh

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.

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Keywords

MERGERS AND ACQUISITIONS; MERGER ARBITRAGE; RISK ARBITRAGE.

Contact Details

Krishnan Maheswaran
Department of Finance,
University of Melbourne,
The University of Melbourne, Parkville, 3010.
E-mail: k.maheswaran@unimelb.edu.au

Soon Chin Yeoh
Department of Finance,
University of Melbourne,
The University of Melbourne, Parkville, 3010.

We gratefully acknowledge the helpful comments of Kevin Davis and an anomous referee, Robert Faff for kindly providing the ASX/Russell Style Indices, the computer programming of Chean-Hou Loke and the assistance of the University of Melbourne Kinsman Scholarship.