Journal of Law, Finance, and Accounting > Vol 3 > Issue 1

Appraisal Arbitrage and Shareholder Value

Scott Callahan, Rutgers Business School, USA, Darius Palia, Rutgers Business School and Columbia Law School, USA, Eric Talley, Columbia Law School, USA,
Suggested Citation
Scott Callahan, Darius Palia and Eric Talley (2018), "Appraisal Arbitrage and Shareholder Value", Journal of Law, Finance, and Accounting: Vol. 3: No. 1, pp 147-188.

Published: 31 May 2018
© 2018 S. Callahan, D. Palia and E. Talley
Corporate finance: Corporate control,  Financial markets: Market efficiency,  Electronic markets, auctions and exchanges,  Treatment modeling,  Industrial Organization: Auctions,  Law and Economics,  Imperfect information,  Procedural rationality,  Game theory,  Public policy,  Rule of law,  Rulemaking

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In this article:
1. Introduction
2. Model
3. Sample Creation and Data Description
4. Empirical Tests and Results
5. Conclusion
A. Proofs of Corollaries


Post-merger appraisal rights have been the focus of heated controversy within mergers and acquisitions circles in recent years. Traditionally perceived as an arcane and cabalistic proceeding, the appraisal action has recently come to occupy center stage through the ascendancy of appraisal arbitrage—whereby investors purchase target-company shares shortly after an announcement principally to pursue appraisal. Such strategies became more feasible and profitable a decade ago, on the heels of two seemingly technocratic reforms in Delaware: (i) the statutory codification of pre-judgment interest, pegging a presumptive rate at five percent above the federal discount rate; and (ii) the Transkaryotic opinion, which effectively sanctified appraisal claims trading. Several commentators have decried appraisal arbitrage as visiting unnecessary risks and costs on deal certainty and pricing, advancing the position that it reduces=destroys target shareholder value. This paper interrogates such claims both theoretically and empirically, testing the predictions of an auction-design model that delivers testable implications about appraisal’s price and welfare implications. We find—consistent with the comparative statics of our model—that the appraisal-liberalizing events of 2007 were associated with a significant increase in deal premia, as the enhanced credibility of appraisal had the effect of raising the de facto “reserve price” associated with M&A auctions. We further find little evidence that liberalized appraisal rights stifled the incidence of appraisal eligible deals. Moreover, when interpreted through the lens of our auction-design model, our findings suggest that target-company shareholders of all stripes likely benefited ex ante from liberalized appraisal.




Commentary Submitted By: Eric Talley, Columbia University.

Description: The Choi and Talley (2017) paper has been accepted for publication in the Journal of Law, Economics & Organization. The correct reference is now: Choi, A. and E. Talley. 2019. "Appraising the 'Merger Price' Appraisal Rule." Journal of Law, Econ. & Organization. 35 (forthcoming).