Two Roles for Summary Accounting Data in Explaining Takeover Premia
22 Pages Posted: 13 Aug 1999
Date Written: July 24, 1999
This paper proposes and tests two roles for summary accounting data in explaining cross-sectional variation in takeover premia. We propose that the target's excess stock return at a takeover bid announcement reflects an expectation that the bidder will extract operating efficiency benefits and/or asset adaptation value from the target, and that the target's pre-bid net income and equity book value proxy for these sources of economic gains. In a sample of 855 initial bids for non-financial targets over 1987-1996, we find evidence consistent with these hypotheses. For bids that are ex-post successful, takeover announcement premia are reliably positively related to target book equity and net income. In contrast, ex-post unsuccessful bids have takeover premia that are unrelated to target net income, and only weakly positively related to target book equity. Our findings are robust to controlling for a variety of factors that prior research has suggested may also explain cross-sectional variation in takeover premia, including poor managerial performance, the choice between a merger and tender offer, target net operating losses, target free cash flow, and bidder size.
JEL Classification: G14, G34, M41
Suggested Citation: Suggested Citation