What is an 'Event Driven Strategy'

An event driven strategy is a type of investment strategy that attempts to take advantage of temporary stock mispricing that can occur before or after a corporate event takes place. The strategy is most often used by private equity or hedge funds due to the large amount of expertise necessary in analyzing corporate events to execute the strategy successfully. The corporate event in question can include restructurings, mergers/acquisitions, bankruptcy, spin-offs, takeovers, and others. An event driven strategy exploits the tendency of a company's stock price to suffer during a period of change.

BREAKING DOWN 'Event Driven Strategy'

Event driven strategies have multiple methods of execution. In all situations, the goal of the investor is to take advantage of temporary mispricings caused by a corporate reorganization, restructuring, merger, acquisition, bankruptcy, or other major event. Investors who use an event driven strategy employ teams of specialists who are experts in analyzing corporate actions and determining the effect of the action on a company's stock price. This analysis includes, among other things, a look at the current regulatory environment, possible synergies from mergers or acquisitions, and a new price target after the action has taken place. A decision is then made about how to invest based on the current stock price versus the likely price of the stock after the action takes place. If the analysis is correct, the strategy will likely make money. If the analysis is incorrect, the strategy may lose money.

Example of an Event Driven Strategy

For example, when an acquisition is announced, the stock price of the target company will often rise. A skilled analyst team will judge whether or not the acquisition is likely to occur based on the regulatory environment. If the acquisition does not happen, the price of the stock may suffer. The analyst team will then decide the likely landing place of the stock price if the acquisition happens based on a careful analysis of the target and acquiring companies. If there is enough potential for upside, the investor may buy shares of the target company to sell after the corporate action is complete and the target company's stock price adjusts.

RELATED TERMS
  1. Event Risk

    An event risk is the possibility that an unforeseen event will ...
  2. Corporate Action

    A corporate action is any event, usually approved by the firm's ...
  3. Accounting Event

    An accounting event is a transaction that is recognized in the ...
  4. Acquisition

    An acquisition is a corporate action in which one company buys ...
  5. Hammering

    Hammering is the rapid and concentrated selling by speculators ...
  6. Defensive Acquisition

    Defensive acquisition is a corporate finance strategy describing ...
Related Articles
  1. Managing Wealth

    The Key To High Returns Is A Disciplined Strategy

    Learn about different investment strategies and how to pick the right one for you.
  2. Investing

    What Investors Can Learn From M&A Payment Methods

    How a company pays in a merger or acquisition can reveal a lot about the buyer and seller.
  3. Trading

    An Introduction To Price Action Trading Strategies

    For traders who want a mix of technical analysis with their own control in decisions, price action trading offers the perfect fit. Here's how it works.
  4. Trading

    Introduction to types of trading: Fundamental traders

    Fundamental trading is a method by which a trader focuses on company-specific events to determine which stocks to buy and when to buy them.
  5. Investing

    Are Hedged Mutual Funds For You?

    Long the purview of institutional investors and ultra-wealthy individuals, financial services firms are making alternative investment strategies available to a wider audience of investors. Understanding ...
  6. Trading

    Trade Simple, Trade Smart

    Simplicity can be a trader's best friend. Here is a simple day trading strategy which takes advantage of a stock's dynamics.
  7. Small Business

    The Basics Of Mergers And Acquisitions

    Learn what corporate restructuring is, why companies do it and why it sometimes doesn't work.
  8. Trading

    No Forex Strategy Of Your Own? Try Mirror Trading

    There are many advantages to trading a mirror strategy, yet markets are dynamic, and regardless there is always a risk of losses.
  9. Investing

    Mergers And Acquisitions: Understanding Takeovers

    In the language of mergers and acquisitions, battleground terms meld with bizarre metaphors to create a unique vocabulary.
RELATED FAQS
  1. How company stocks move during an acquisition

    During an acquisition, there's a short-term impact on the stock prices of both companies. Typically, the target company's ... Read Answer >>
  2. What is the difference between a merger and an acquisition?

    Learn about the legal differences between a corporate merger and corporate acquisition – terms used when companies are either ... Read Answer >>
  3. What are some examples of different taxable events?

    Learn what a taxable event is and how it affects investors and taxpayers with examples of taxable events that can result ... Read Answer >>
  4. How do I evaluate whether a company is a good acquisition candidate?

    Evaluate whether a company is a good acquisition candidate by analyzing its price, debt load, litigation and financial statements. Read Answer >>
Trading Center