The author of this essay, John C. Coffee, Jr. (Professor, Columbia Law School, comfy endowed chair) is very sharp and I don't understand why he uses the arbitrageur label. There is no arb available, there is no pair trade, there is not even a dirty hedge. What we see are speculators making guesses, informed or otherwise, as to the probabilities of the various outcomes.
As they used to say in the '80's, "In risk arbitrage the emphasis is on the first syllable."
That quibble aside—and it truly is a quibble, not impacting his thesis and actually mattering only to folks engaging in erudite (or idiotic) discussions of J.P. Morgan trading the New York/London gold point arbitrage*—we are fans of the good Professor.
From Columbia Law School's Blue Sky blog, July 27:
Every pundit and commentator has by now analyzed the ongoing battle between Elon Musk and Twitter over Musk’s attempt to walk away from their deal. Almost all of these evaluations have rated Twitter as having a considerably stronger case, because (among other reasons) Musk did no due diligence, was well aware of the “bot” (or fake user) problem, negotiated no contractual protections directly addressed to these risks, and generally behaved inequitably, disparaging Twitter and toying with the SEC’s rules. Okay, but that raises an interesting puzzle: If the facts favor Twitter, and if Musk’s offer was for $54.20 a share (and Twitter’s stock price was languishing at below $35 per share at the time Twitter’s suit was filed), what explains this wide price disparity? Normally, the arbs buy the target stock until its price approaches the merger price (minus some allowance for risk). Most recently, Twitter’s stock price rose to around $39 after the Delaware chancellor granted the company an expedited trial. Even if the movement is in the right direction, there is still a wide gap.
Why? True believers in the efficient market may conclude that the arb community doubts that the Delaware Chancery Court will grant Twitter specific performance, the remedy that it is seeking. They may expect that Musk will escape Delaware with a liability no higher than the $1 billion ceiling that is specified in the parties’ merger agreement. Although this ceiling does not bar an award of specific performance, the arbs may expect that the maximum damages will not exceed $1 billion. If so, they would only price up Twitter’s stock a modest amount. Alternatively, those who are more inclined towards behavioral economics may believe that some kinds of qualitative and judgmental information are not easily priced by the market, and so price movement may be slower. Possibly that could explain a slower market response, but much of the information here is publicly available to anyone who looks. Finally, there may be some that doubt that any large liability can be enforced against Musk, even if Delaware imposes it (perhaps he will escape to Mars).
So what best explains the failure of the arbs to buy in quantity and boost the price of Twitter when they think it will win?....
....MUCH MORE
JPMorgan Gold Traders Found Guilty After Long Spoofing Trial
You have to go to the master, Professor Officer (take that Herr Prof. Dr. Dr. Krugman) for the whole scoopage:
