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

Danbolt, Jo and Siganos, Antonios and Tunyi, Abongeh A (2016) Abnormal Returns from Takeover Prediction Modelling: Challenges and Suggested Investment Strategies. Journal of Business Finance & Accounting, 43 (1-2). pp. 66-97. ISSN 1468-5957

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Official URL: http://onlinelibrary.wiley.com/doi/10.1111/jbfa.12...

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: Article
Additional Information and Comments: This is the peer reviewed version of the following article: Danbolt, Jo and Siganos, Antonios and Tunyi, Abongeh A (2016) Abnormal Returns from Takeover Prediction Modelling: Challenges and Suggested Investment Strategies. Journal of Business Finance & Accounting, 43 (1-2). pp. 66-97., which has been published in final form at http://onlinelibrary.wiley.com/doi/10.1111/jbfa.12179/abstract?. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Self-Archiving.
Keywords: takeover prediction;abnormal returns;portfolio strategies;investment timing;firm size;rumours
Faculty / Department: Faculty of Arts & Humanities > Business School
Depositing User: Tunyi Tunyi Abongeh
Date Deposited: 30 Sep 2016 13:50
Last Modified: 30 Sep 2016 13:50
URI: http://hira.hope.ac.uk/id/eprint/1062

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