Darius Palia and colleagues' research in Legal Theory Blog: Appraisal Arbitrage and Shareholder Value

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Date: 
Tuesday, November 14, 2017

Legal Theory Blog

Scott Callahan (Rutgers, The State University of New Jersey - Rutgers Business School), Darius Palia (Rutgers Business School; Center for Contract & Economic Organization), Eric L. Talley (Columbia University - School of Law) have posted Appraisal Arbitrage and Shareholder Value on SSRN

Abstract:

Post-merger appraisal rights have become the focus of heated controversy in mergers and acquisitions law in recent years. Though traditionally perceived as an arcane and cabalistic proceeding, the appraisal action has gained prominence through the ascendancy of appraisal arbitrage—whereby investors purchase target-company shares shortly after an announcement solely to pursue appraisal.

Several commentators have decried appraisal arbitrage as an imposition of unnecessary risks and costs on deal activity and pricing, advancing the position that the liberalization of appraisal reduces/destroys shareholder value.

This paper interrogates such claims, utilizing an auction-design model that delivers several testable implications. We find that—consistent with our model's predictions—the appraisal-liberalizing events of 2007 were associated with a significant increase in deal premia, as the enhanced credibility of appraisal implicitly raised the de facto "reserve price" associated with M&A auctions. We further argue that the nature and extent of these shocks suggest that shareholders likely benefited ex ante from liberalized judicial policies related to appraisal.

Legal Theory Blog

Appraisal Arbitrage and Shareholder Value on SSRN

TAGS: Blogs Darius Palia Finance and Economics Mergers and Acquisitions