Investigating the excess risk-adjusted returns to merger arbitrage in Singapore

Abstract

In this paper, we examine the risk-adjusted returns to merger arbitrage in Singapore and investigate the presence of abnormal excess returns. Using a sample of 173 transactions in Singapore from 2001 to 2016 (both inclusive), we construct a time series of returns to value weighted, equal weight, and practitioner portfolios. We also attempt to estimate transaction costs including brokerage, taxation, and market impact costs for our portfolios. We then analyze these returns through the CAPM model, Fama and French (1993) three-factor model, as well as a non-linear contingent claims analysis to account for the option like structure of merger arbitrage. We find mean excess annual returns of up to 5.03% before accounting for transaction costs, and 1.09% including transaction costs. We find that merger arbitrage in Singapore has significant capacity constraints, with excess returns decreasing sharply as the size of the portfolio increases. After transaction costs are included, these excess returns are no longer economically significant. Additionally, we find that the merger arbitrage strategy is relatively uncorrelated to the market, with no evidence supporting the hypothesis that merger arbitrage has a higher beta in down markets for Singapore