An empirical analysis of the incentives to engage in costly information acquisition. The case of risk arbitrage

David F. Larcker*, Thomas Lys

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

47 Scopus citations

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.

Original languageEnglish (US)
Pages (from-to)111-126
Number of pages16
JournalJournal of Financial Economics
Volume18
Issue number1
DOIs
StatePublished - Jan 1 1987

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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