Two Roles for Summary Accounting Data in Explaining Takeover Premia

22 Pages Posted: 13 Aug 1999

See all articles by John R. M. Hand

John R. M. Hand

University of North Carolina Kenan-Flagler Business School

Luann J. Lynch

University of Virginia - Darden School of Business

Date Written: July 24, 1999

Abstract

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

Hand, John R. M. and Lynch, Luann J., Two Roles for Summary Accounting Data in Explaining Takeover Premia (July 24, 1999). Available at SSRN: https://ssrn.com/abstract=172410 or http://dx.doi.org/10.2139/ssrn.172410

John R. M. Hand (Contact Author)

University of North Carolina Kenan-Flagler Business School ( email )

McColl Building
Chapel Hill, NC 27599-3490
United States
919-962-3173 (Phone)
919-962-4727 (Fax)

Luann J. Lynch

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-924-4721 (Phone)
434-243-7677 (Fax)

HOME PAGE: http://www.darden.virginia.edu/faculty/lynch.htm

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