This paper examines arbitrage spreads and returns following acquisition announcements in 362 cash tender offers spanning the 1981-1995 period. Arbitrage spreads in acquisitions, defined as the percentage difference between the bid price and market price one day after the initial announcement, exhibit a positive mean, with considerable cross-sectional variation. We model these spreads as the visible component of total arbitrage returns; they represent the “price” paid to earn subsequent returns. Empirically, they are significantly related to bid premiums, pre-offer runup, initial managerial attitude about the offer, and the existence of rumors about the offer. Significant abnormal volume is observed around our offers and enhanced explanatory power is noted in a regression using cases with higher abnormal volume. Analysis of the relation between initial arbitrage spreads and subsequently revealed offer characteristics is consistent with market anticipation of the duration and price resolution of the offers.
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