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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
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URI: https://cronfa.swan.ac.uk/Record/cronfa65107
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first_indexed 2023-11-26T11:00:46Z
last_indexed 2023-11-26T11:00:46Z
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spelling v2 65107 2023-11-26 Abnormal Returns from Takeover Prediction Modelling: Challenges and Suggested Investment Strategies eefe2792c8eed5b49feede33981dfa53 Tunyi Tunyi Abongeh Tunyi Tunyi Abongeh true false 2023-11-26 BAF 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. Journal Article Journal of Business Finance &amp; Accounting 43 1-2 66 97 Wiley 0306-686X 1468-5957 Takeover prediction, abnormal returns, portfolio strategies, investment timing, firm size, rumours 14 3 2016 2016-03-14 10.1111/jbfa.12179 http://dx.doi.org/10.1111/jbfa.12179 COLLEGE NANME Accounting and Finance COLLEGE CODE BAF Swansea University Not Required 2024-01-03T09:58:23.2888709 2023-11-26T11:00:04.3335303 Faculty of Humanities and Social Sciences School of Management - Accounting and Finance Jo Danbolt 1 Antonios Siganos 2 Tunyi Tunyi Abongeh 3
title Abnormal Returns from Takeover Prediction Modelling: Challenges and Suggested Investment Strategies
spellingShingle Abnormal Returns from Takeover Prediction Modelling: Challenges and Suggested Investment Strategies
Tunyi Tunyi Abongeh
title_short Abnormal Returns from Takeover Prediction Modelling: Challenges and Suggested Investment Strategies
title_full Abnormal Returns from Takeover Prediction Modelling: Challenges and Suggested Investment Strategies
title_fullStr Abnormal Returns from Takeover Prediction Modelling: Challenges and Suggested Investment Strategies
title_full_unstemmed Abnormal Returns from Takeover Prediction Modelling: Challenges and Suggested Investment Strategies
title_sort Abnormal Returns from Takeover Prediction Modelling: Challenges and Suggested Investment Strategies
author_id_str_mv eefe2792c8eed5b49feede33981dfa53
author_id_fullname_str_mv eefe2792c8eed5b49feede33981dfa53_***_Tunyi Tunyi Abongeh
author Tunyi Tunyi Abongeh
author2 Jo Danbolt
Antonios Siganos
Tunyi Tunyi Abongeh
format Journal article
container_title Journal of Business Finance &amp; Accounting
container_volume 43
container_issue 1-2
container_start_page 66
publishDate 2016
institution Swansea University
issn 0306-686X
1468-5957
doi_str_mv 10.1111/jbfa.12179
publisher Wiley
college_str Faculty of Humanities and Social Sciences
hierarchytype
hierarchy_top_id facultyofhumanitiesandsocialsciences
hierarchy_top_title Faculty of Humanities and Social Sciences
hierarchy_parent_id facultyofhumanitiesandsocialsciences
hierarchy_parent_title Faculty of Humanities and Social Sciences
department_str School of Management - Accounting and Finance{{{_:::_}}}Faculty of Humanities and Social Sciences{{{_:::_}}}School of Management - Accounting and Finance
url http://dx.doi.org/10.1111/jbfa.12179
document_store_str 0
active_str 0
description 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.
published_date 2016-03-14T09:58:25Z
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score 11.017797

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