Abstract

Using a sample of Canadian mergers data from Securities Data Corporation (SDC) for the 1990-1997 period, and returns data from the TSE Western database, I demonstrate that the average arbitrage spreads of Canadian mergers are significantly higher than those of their American counterparts. The arbitrage spread is defined as the percentage difference between the bid price and market price one day after the initial announcement. I also demonstrate that the cross-sectional variation of these spreads is high, and negative in some instances. Buying the targets of the entire sample and shorting their bidders does not yield abnormal returns. However, smarter trading focused on specific segments of the sample yield short-term abnormal returns. I find that trading strategies based on buying the following three categories of targets offer the highest level of abnormal return. The categories are; target firms in the largest quartile of the relative size ratio; firms subject to both cash offers and firms subject to cash tender offers. Typical of merger studies, we find that target companies experience highly significant abnormal returns on the announcement day, and slightly lower significant abnormal returns on the following day.