Suppose I hold a stock that's recently had a run-up because another company has made a bid to acquire it. It seems like I should almost always sell the stock in this case, because there are only a couple different possible outcomes:
1) The merger goes through, and I make a few pennies more (the spread between the current price and the announced takeover price)
2) The merger falls through, and the stock drops significantly.
On average, the likelihood of these two possibilities will be fairly reflected in the stock price due to people who practice merger arbitrage strategies. So as an individual investor, I should be pretty much indifferent over the long run. But in the short run, the possibility of (2) hugely increases my volatility.
So does it almost always make sense to sell if the spread between the announced takeover price and the current trading price is small?