Estimate risk-neutral probabilities and the rational for its application. Empirical results of predictive power assessment for risk-neutral probabilities as well as their comparisons with stock-implied probabilities defined as in Samuelson and Rosenthal.
Аннотация к работе
Literature overview Mergers and acquisitions are, perhaps, the most heavily studied topic in corporate finance. However, the literature that studies the source of uncertainty for M&A deals is relatively scares, as most of the works concentrate on determining value and wealth effects as well as their drivers. Perhaps the first steps in academic research that investigates M&A deal success probability were taken in 1980s following the boom of M&A activity driven by private equity firms. Brown and Raymond (1986) proposed a method of estimating success probability based on a fallback price that they assumed to be equal to the pre-announcement price (on average over a number of weeks). This paper was greatly influenced by Samuelson and Rosenthal’s work and mainly follows its footsteps in the framework of methodology used to access probabilistic forecasts. Samuelson and Rosenthal as well as Brown and Raymond focus only on the stock market price movements and ignore the effect of proposed acquisitions on derivatives market, options in particular. Jayamaran, Mandelker and Shastri (1991) were among the first to show that strong inferences regarding M&A activity can be drawn from option prices. Baker and Savasoglu (2002) reported that a diversified portfolio of risk arbitrage positions generate a modest abnormal return of 0,6%-0,9% per month and, most importantly to this study, that returns to risk arbitrage increase in ex ante prediction of completion risk.