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

Journal of Business Finance & Accounting, Forthcoming

Posted: 2 Feb 2016

See all articles by Jo Danbolt

Jo Danbolt

University of Edinburgh Business School

Antonios Siganos

University of Glasgow

Abongeh A. Tunyi

The University of Sheffield

Multiple version iconThere are 2 versions of this paper

Date Written: January 20, 2016

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 prebid 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.

Keywords: Takeover prediction, abnormal returns, portfolio strategies, investment timing, firm size, rumours

JEL Classification: G11, G12, G14, G34

Suggested Citation

Danbolt, Jo and Siganos, Antonios and Tunyi, Abongeh A., Abnormal Returns from Takeover Prediction Modelling: Challenges and Suggested Investment Strategies (January 20, 2016). Journal of Business Finance & Accounting, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2725389

Jo Danbolt (Contact Author)

University of Edinburgh Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

Antonios Siganos

University of Glasgow ( email )

Adam Smith Business School
Glasgow, Scotland G12 8LE
United Kingdom

Abongeh A. Tunyi

The University of Sheffield ( email )

17 Mappin Street
Sheffield, Sheffield S1 4DT
United Kingdom

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