Abstract
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This study investigates whether mutual funds take positions in companies that subsequently
engage in mergers and acquisitions and whether funds adjust portfolio holdings in the same
direction as wealth creation from mergers. This study also examines whether trading surrounding
the merger announcements leads to higher risk-adjusted performance for the funds’ investors.
The sample includes mergers conducted by publicly traded acquirers of public and private targets
over 2003 – 2016. This paper applies multivariate regression in analyses, controlling for fund
objective and time fixed effects, to analyze whether the proportion of mutual funds’ portfolio
invested in companies undergoing mergers, as well as merger trading intensity, is related to the
fund risk-adjusted performance.
Companies involved in mergers experience aggregate change in mutual fund holdings in the
merger pre-announcement and announcement quarters. Moreover, the holdings are adjusted in
the same direction as the wealth created by the merger during the announcement quarter. The
results also show that fund managers more vested in the merger transaction generate higher
contemporaneous and subsequent risk-adjusted performance, indicative of managerial skill. The
performance results are economically meaningful. Finally, we show that fund managers who trade actively on mergers generate higher returns for their shareholders in the announcement
quarter and engage in this strategy persistently.