The Relationship Between Beta and Arbitrage Spread in M&A Deals

Abstract

Risk arbitrage is an event-driven investment strategy where the risk arbitrageur aims to capture the arbitrage spread between the target’s stock price and the bid price by the acquiring firm in a merger and acquisition (M&A) deal. Previous research suggests that specific risks connected to the deal as completion or duration risks, as well as firm and bid characteristics, influence the arbitrage spread. We contribute to the risk arbitrage literature by investigating whether a firm’s beta (β) influences the arbitrage spread and the risks connected to the deal. The study is achieved through conducting a regression analysis measured on an international sample of 673 observations from 1995-2022. The results do not document any significant relationships between beta, arbitrage spread, and the days to resolution. The target beta was, however, found positively significant with the successful deal variable, and several control variables in the study revealed interesting effects, which brings a more recent contribution to the risk arbitrage literature and a valuable input for risk arbitrageurs around the world.