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Abnormal Returns from Takeover Prediction Modelling: Challenges and Suggested Investment Strategies

Jo Danbolt, Antonios Siganos, Tunyi Tunyi Abongeh

Journal of Business Finance & Accounting, Volume: 43, Issue: 1-2, Pages: 66 - 97

Swansea University Author: Tunyi Tunyi Abongeh

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DOI (Published version): 10.1111/jbfa.12179

Abstract

While takeover targets earn significant abnormal returns, studies tend to find no abnormal returns from investing in predicted takeover targets. In this study, we show that the difficulty of correctly identifying targets ex ante does not fully explain the below-expected returns to target portfolios....

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Published in: Journal of Business Finance & Accounting
ISSN: 0306-686X 1468-5957
Published: Wiley 2016
Online Access: Check full text

URI: https://cronfa.swan.ac.uk/Record/cronfa65107
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Abstract: While takeover targets earn significant abnormal returns, studies tend to find no abnormal returns from investing in predicted takeover targets. In this study, we show that the difficulty of correctly identifying targets ex ante does not fully explain the below-expected returns to target portfolios. Target prediction models’ inability to optimally time impending takeovers, by taking account of pre-bid target underperformance and the anticipation of potential targets by other market participants, diminishes but does not eliminate the potential profitability of investing in predicted targets. Importantly, we find that target portfolios are predisposed to underperform, as targets and distressed firms share common firm characteristics, resulting in the misclassification of a disproportionately high number of distressed firms as potential targets. We show that this problem can be mitigated, and significant risk-adjusted returns can be earned, by screening firms in target portfolios for size, leverage and liquidity.
Keywords: Takeover prediction, abnormal returns, portfolio strategies, investment timing, firm size, rumours
College: Faculty of Humanities and Social Sciences
Issue: 1-2
Start Page: 66
End Page: 97