Abstract
This study empirically examines risk arbitrage profitability in South Africa. The analysis draws on a dataset comprising 158 transactions involving acquirer and target firms listed on the Johannesburg Stock Exchange (JSE) over the period 1996–2025. Using the event study methodology (ESM), cumulative average abnormal returns (CAARs) were computed across a 41-day event window to assess stock market responses to merger and acquisition (M&A) announcements. Parametric t-tests were used to evaluate the statistical significance of CAARs, complemented by comparative analyses of pre- and post-announcement performance. To account for volatility dynamics, an Exponential Generalized Autoregressive Conditional Heteroskedasticity (EGARCH) model was applied to a sub-sample of eight transactions, while nonparametric procedures, the Sign Test and Wilcoxon Signed-Rank Test, served as robustness checks. The findings indicate an absence of discernible market anticipation before announcements, with CAARs remaining small and statistically insignificant during the pre-event period. The announcement date exhibits a pronounced and highly significant positive reaction, confirming that merger announcements elicit substantial abnormal returns for target firms. Although the strongest effects are concentrated around the announcement day, significance persists across extended post-announcement horizons (up to 20 trading days), suggesting that merger arbitrage strategies can yield abnormal profits beyond the short-term, a pattern that diverges from developed markets, where abnormal returns typically dissipate rapidly. EGARCH-adjusted results corroborate these conclusions, revealing sharp and statistically significant reactions within narrow windows after controlling for volatility clustering and asymmetric shock responses, while broader windows remain insignificant. Nonparametric tests provide distribution-free confirmation of these findings, reinforcing the robustness of the results and showing that merger announcements systematically generate positive abnormal returns for target firms, independent of parametric assumptions and resilient to outlier effects.