Managing Principal Gaurav Jetley and Vice President Xinyu Ji discussed risk and return in “ The Shrinking Merger Arbitrage Spread: Reasons and Implications” (Financial Analysts Journal, March/April 2010). In that study, which covered 1990 to 2007, the authors found that the merger arbitrage spread had declined significantly since the early 2000s, mainly due to (1) increased trading in the targets’ stocks following the M&A announcements, (2) reduced transaction costs, and (3) changes in risk related to merger arbitrage. The authors also argued that some of the decline would likely be permanent.
The authors updated their research, extending their analysis to the first half of 2013 and revealing how the merger arbitrage spread behaved both during and since the 2008/2009 financial crisis. The latest results suggest that after a temporary deviation in 2008 and 2009, the merger arbitrage spread has continued its declining trend.