Merger Arbitrage Returns in South East Asia

Abstract

In this study I have analyzed 148 deals in Thailand, Malaysia, Indonesia, and Philippines from 2010 to 2020 to investigate and characterize merger arbitrage returns in South East Asia. Results show that merger arbitrage strategy has a monthly abnormal return of 5.3% in a simple equal weighted average portfolio. After taking into account practical limitations like transaction costs and foreign exchange costs the monthly abnormal return was 0.96% with a beta of 0.031. This represents an annualized abnormal return of 12.2% - much higher than previous studies done in developed markets. Furthermore through a restricted regression, I find that unlike the US market, merger arbitrage in South East Asia is actually a market neutral strategy. Lastly, given that there is significant level of abnormal returns, I proceeded to investigate the cross-section of those returns. The most significant factor is the proportion of retail investor in the target company. In fact, a one standard deviation increase in the proportion of retail investor increases returns by 7%, 14%, and 18% for Thailand, Indonesia, and Philippines respectively holding all else constant. Furthermore, investigating the proportion of retail investor the day before the deal announcement and 3-days after shows the average holding decrease by 8.2%. This evidence uncovers, for the first time, a force-selling phenomena whereby retail investor sells their shares once a deal is announced, widening the spread and thus increasing the profit an arbitrageur can make. Since emerging markets like South East Asia are dominated by retail investors, this explains how EM market is able to generate much more attractive returns than developed markets.