A research paper examines the extent to which economic incentives may have improved for appraisal arbitrageurs in recent years, which could help explain the observed increase in appraisal activity. The authors document that the Delaware Chancery Court “seems to prefer a lower equity risk premium than bankers. Such a systematic difference in valuation input choices also works in favor of appraisal arbitrageurs.” The paper concludes that appraisal arbitrageurs enjoy an economic benefit by delaying their investment until after the record date, as they are privy to better information about the target’s value while minimizing their exposure to the risk of deal failure. The authors propose several recommendations, including limiting the ability of shareholders to seek appraisal for shares acquired after the record date.

The paper is Appraisal Arbitrage—Is There a Delaware Advantage? by Gaurav Jetley and Xinyu Ji (both with Analysis Group, Inc.).