Deal Spreads in European Cross-Border M&A : Do Deal Spreads Adequately Reflect the Risk in Merger Arbitrage?

This paper documents inefficient pricing in deal spreads of European M&A targets. Despite a heterogeneous takeover environment we find no significant difference between spreads of domestic and European cross-border transactions. This deal spread parity suggests an equivalent degree of arbitrage risk. Yet, we observe a significantly worse merger arbitrage performance in European cross-border deals. To some extent, this inconsistency is explained by cultural distance that is not adequately reflected in deal spreads. By comparing different levels of European integration, we find that the inconsistency is strongest on the highest level of economic integration, i.e., the Euro area. Our results are consistent with the hypothesis of an illusion-of-conformity