TY - JOUR
T1 - An empirical analysis of the incentives to engage in costly information acquisition. The case of risk arbitrage
AU - Larcker, David F.
AU - Lys, Thomas
N1 - Funding Information:
*The research support of Ernst & Whinney, the Beatrice Foods Research Foundation, and the Accounting Research Center at the J.L. Kellogg Graduate School of Management is gratefully acknowledged. We would also like to acknowledge the comments from seminar discussions at Northwestern University, Purdue University, and the University of Pennsylvania and the helpful comments of Larry Dann. Harry DeAngelo, John Elliott, Mark Grinblatt, Larry Glosten, Nicholas Goaedes, Paul Healy, Florence Kirk, Richard Leftwich, Wayne Mikkelson. Richard Ruback (the referee), Robert Verrecchia, Ross Watts, and the editor, Michael C. Jensen.
PY - 1987/3
Y1 - 1987/3
N2 - 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.
AB - 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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U2 - 10.1016/0304-405X(87)90063-8
DO - 10.1016/0304-405X(87)90063-8
M3 - Article
AN - SCOPUS:38249036154
SN - 0304-405X
VL - 18
SP - 111
EP - 126
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 1
ER -