An empirical analysis of the incentives to engage in costly information acquisition: The case of risk arbitrage |
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Institution: | 1. Department of Physics, Technion, Haifa 32000, Israel;2. Grup de Física Estadística, Departament de Física, Universitat Autònoma de Barcelona, Edifici Cc.,\n08193 Cerdanyola (Bellaterra), Spain;1. Universidade Federal de Minas Gerais, Av. Antônio Carlos, 6627 - Pampulha, Belo Horizonte, Minas Gerais 31270-901, Brazil;2. Centro Federal de Ensino Tecnológico de Minas Gerais, Minas Gerais, Brazil;3. Universidade Federal do Amazonas, Amazonas, Brazil;4. INESC-ID, Instituto Superior Técnico, Universidade de Lisboa, Porto Salvo, Portugal |
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Abstract: | In order for security prices to be informationally efficient, incentives must exist for traders to engage in costly information acquisition. This paper provides empirical evidence on this proposition. We observe that risk arbitrageurs (i.e., market participants who trade in securities of firms that are involved in mergers, tender offers, and voluntary liquidations) are able to generate private information regarding the success or failure of corporate reorganizations. Moreover, risk arbitrageurs earn substantial returns on their trading activities. These results suggest that security prices are sufficiently noisy to create incentives for costly information acquisition. |
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