Abnormal returns from takeover prediction modelling: challenges and suggested investment strategies

Danbolt, J., Siganos, A. and Tunyi, A. (2016) Abnormal returns from takeover prediction modelling: challenges and suggested investment strategies. Journal of Business Finance and Accounting, 43(1-2), pp. 66-97. (doi: 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. 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.

• Item Type: Articles
• Status: Published
• Refereed: Yes
• Glasgow Author(s) Enlighten ID: Siganos, Professor Antonios
• Authors: Danbolt, J., Siganos, A., and Tunyi, A.
• College/School: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Journal Name: Journal of Business Finance and Accounting
• Publisher: Wiley
• ISSN: 0306-686X
• ISSN (Online): 1468-5957
• Published Online: 14 March 2016
• Copyright Holders: Copyright © 2016 John Wiley & Sons Ltd
• First Published: First published in Journal of Business Finance and Accounting 43(1-2):66-97
• Publisher Policy: Reproduced in accordance with the copyright policy of the publisher