Expanding the Limits of Merger Arbitrage

In this paper we show that when bidders are in the S&P 500 Index, risk arbitrage portfolio returns are 85 percent larger than when they are not. We also show that acquisitions by S&P 500 buyers are more likely to be completed, and take less time to complete, than are deals by different buyers. These results indicate that risk arbitrage returns can be extended by strategies involving S&P 500 bidders. In addition, we find share price runups followed by price reversals on all buyer types when stock, and not cash, is used as currency for the acquisition. This phenomenon occurs around merger completion, which is a non-information day. Thus, our finding documents that the buyers' short-run demand curve exhibits inelastic behavior, and is evidence in support for Scholes' (1972) price-pressure hypothesis.