Abstract

For decades, merger arbitrageurs have enjoyed significantly higher returns than those enjoyed by targets, on average. However, these returns are only enjoyed if the merger or acquisition ultimately occurs. An arbitrageur estimates several critical and interrelated factors before assuming any position. These factors are transaction risks, potential reward and the probability of event occurrence. The literature, thus far, has failed to establish a successful takeover success prediction model, which by definition, would use publicly available information at the time of the announcement. In this paper, we use a simple logistic model to test the ability of our four proposed takeover success prediction models. Our sample consists of the targets associated with the first or initial bids for corporate control in bidding contests between 1993 and 2005. We introduce two new variables! turnover and run-up as indicators of arbitrageur activity and market anticipation, respectively. Consistent with theory, turnover, when high enough to facilitate arbitrageur influence on deal outcomes without the dilution of their information advantage, is significant in predicting deal success. This relationship is strongest for seller-initiated turnover. In addition, we find that market anticipation is positively and significantly related to the probability of deal success.