This paper analyses the risk and return characteristics from a merger arbitrage trading strategy in Germany for the first time. The extant literature focuses mainly on data sets from Anglo-American based jurisdictions with mixed results. We argue that because in Germany i) acquisition laws bias consideration toward cash bids thereby decreasing the uncertainty of announced transactions (versus share offers) and ii) the Aufsichstrat (supervisory board with employee participation) has corporate governance oversight over any proposed merger such that only bids tacitly approved by it are likely to be announced in the first instance, a merger arbitrage trading strategy in a German setting will have different risk and return characteristics. To estimate the significance of merger arbitrage returns we construct a realistic measure of risk arbitrage which factors in transaction costs and other practical limitations encountered by arbitrageurs employing this strategy. We also construct two additional portfolios, an equally-weighted portfolio and a value weighted portfolio, for comparison purposes. The results show that the practical risk arbitrage manager portfolio fails to outperform on a risk-adjusted basis indicating that insofar as the German setting yields benefits in the form of lower risk, these are properly priced by the market.
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