Merger Arbitrage. Kirchner Thomas

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      Daily total returns differ from daily stock price returns in that they incorporate dividends. For dividend paying stocks, price return will be negative on the ex-date of a dividend, even though the investor receives a separate cash flow from the dividend payment. Therefore, total returns are the appropriate measure that will be used for the remainder of this book.

      To demonstrate that this is not just an effect in isolated cases, pre- and post-announcement volatilities of 258 mergers were analyzed. The data set consists of 258 cash mergers for the period of March 31, 2010, until March 31, 2014, retrieved from the Bloomberg database. Total returns for these stocks were retrieved also from Bloomberg. The calculation for premerger volatilities and returns starts 60 trading days before the announcement, and post-merger returns and volatilities are calculated from the day following the announcement for 60 days or until completion, whichever came first. The histogram in Figure 3.2 shows the resulting cross-sectional distribution of returns. The height of the bars in these histograms shows the number of stocks whose returns fell within a given range. The distribution of dark bars is that of pre-announcement returns, that of light bars of the returns post-announcement.