Appraisal Challenges and Benefits to Target Shareholders Through Narrowing Arbitrage Spread
Harvard Law School Forum on Corporate Governance and Financial Regulation, October 3, 2019
An article in The Journal of Law and Economics holds that a rise in appraisal litigation in the Delaware Chancery Court benefits shareholders of firms targeted for acquisition. One of the points made by the article is that deals subject to appraisal challenges exhibit, on average, a 6 percent lower arbitrage spread than deals that are not subject to an appraisal challenge, where the arbitrage spread is the gap between the offer price and the stock price of the target company in the days following the announcement of a transaction.
A blog post in the Harvard Law School Forum on Corporate Governance and Financial Regulation takes issue with this analysis. In “Appraisal Challenges and Benefits to Target Shareholders Through Narrowing Arbitrage Spread,” Analysis Group Managing Principal Gaurav Jetley and Vice President Yuxiao Huang analyze the article’s conclusions and find that the disparity in arbitrage spread between the two kinds of deals can be attributed to errors and sampling biases in the data. Mr. Jetley and Dr. Huang make a number of adjustments to remove these inaccuracies, and show that there is no economic evidence that appraisal challenges benefit target shareholders through smaller arbitrage spreads.
Read an article coauthored by Mr. Jetley on the shrinking arbitrage spread