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

Danbolt, Jo; Siganos, Antonios; Tunyi, Abongeh A.

doi:10.1111/jbfa.12179

Cited by 30 publications

(100 citation statements)

References 74 publications

(213 reference statements)

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“…An assessment of a firm's vulnerability to future takeovers (i.e., takeover likelihood, henceforth TALI) is relevant for strategic management, as well as investment purposes (Palepu, 1986;Powell, 2001; Danbolt et al, 2016). Given the high abnormal returns that accrue to such firms (Franks and Harris, 1989;Danbolt, 2004), a potentially lucrative investment strategy can be developed around takeover target prediction (Powell, 2001).…”

Section: Introductionmentioning

confidence: 99%

“…Specifically, this study is motivated by the lack of consistent empirical support for one of the key hypotheses for takeover prediction-the firm size hypothesis. The hypothesis as put forward by Palepu (1986), and widely adopted across the takeover prediction literature (see, for example, Ambrose and Megginson, 1992;Powell, 1997Powell, , 2001Powell, , 2004Powell and Yawson, 2007;Gorton et al, 2009;Cremers et al, 2009;Danbolt et al, 2016;Tunyi and Ntim, 2016), argues that TALI is decreasing with target firm size (henceforth, SIZE) i.e., small (large) firms are more (less) vulnerable to takeover bids.…”

Section: Introductionmentioning

confidence: 99%

“…The rationale is that several size-related transaction costs are associated with acquiring a target and, therefore, the number of viable acquirers for a target decreases as its size increases. These costs can include the market price plus a premium for the target, M&A negotiation fees (adviser, consultants and investment banks, amongst others) and the cost of absorbing the target into the acquirer's operating framework (Palepu, 1986;Powell, 2001;Danbolt et al, 2016). In this paper, this is referred to as the "affordability" argument.…”

Section: Introductionmentioning

confidence: 99%

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Firm size, market conditions and takeover likelihood

Tunyi

2019

RAF

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Purpose The firm size hypothesis – takeover likelihood (TALI) decreases with target firm size (SIZE) – has enjoyed little traction in the TALI modelling literature; hence, this paper aims to redevelop this hypothesis while taking account of prevailing market conditions – capital liquidity and market performance. Design/methodology/approach The study uses a logit modelling framework to model TALI. Model performance is assessed using receiver operating characteristic (ROC) curve analysis. The empirical analysis is based on a UK sample of 34,661 firm-year observations drawn from 3,105 firms and 1,396 M&A deals over a 30-year period (1987-2016). Findings While acquirers generally seek smaller targets because of transaction cost constraints, the paper shows that the documented negative relation between SIZE and TALI arises from sampling bias. Over a full sample, mid-sized firms are most at risk of takeovers. Additionally, market conditions moderate the SIZE–TALI relationship, with acquirers more inclined to pursue comparatively larger targets when financing costs are low and market growth or sentiment is high. The results are generally robust to endogeneity. Research limitations/implications Sample truncation on the basis of SIZE leads to empirical misspecification of the TALI–SIZE relation. In an unbiased sample, an inverse U-shaped specification between TALI and SIZE sufficiently models the underlying relation and leads to improvements in the predictive ability of TALI models. Originality/value This study advances a new firm size hypothesis which is consistent with classic M&A theories. The study also evidences market conditions as a moderator of the acquirer’s choice of target SIZE. A new model specification which recognises the non-linear relation between TALI and SIZE and accounts for the moderating effect of market conditions on the SIZE-TALI relationship leads to improvements in the performance of TALI prediction models.

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Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

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Firm size, market conditions and takeover likelihood

Tunyi

2019

RAF

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“…Sixth, future research should use the same period -Our review further shows that most of the studies on M&A activities focus on a relatively short period, with the exception of a few researchers who have extended their analysis above ten years. Hogholm (2016), Gan et al (2017) and Danbolt et al (2016) have extended their analysis for a period of 13, 20 and 23 years, respectively. Tuch and O"Sullivan (2007) described a short time as the days or months around the announcement of the bid, whilst long-time denotes as periods of month or years.…”

Section: New Directions For Future Research and Contributions To Knowmentioning

confidence: 99%

“…For example, finance researchers find that acquirers" abnormal returns ARs around merger announcement are either zero or negative and significant (Goddard et al, 2012;Braga & Gomes, 2016). In contrast, the ARs of targets are generally positive and significant (see, Danbolt et al, 2016;Gan et al, 2017). Jandik and Lallemand (2017) find that target issue more debt immediately before announcement results significant positive gain to target shareholders, but shareholders of bidder experience negative ARs.…”

Section: Introductionmentioning

confidence: 99%

Mergers and Acquisitions and Multinational Companies: A Review and Research Agenda

Kyei-Mensah¹

2019

IJEF

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We review the theoretical and empirical studies concerned with mergers and acquisitions (M&A) to evaluate the knowledge in the area and to recommend new areas for future research. Unlike other reviews, we focus on research in finance, accounting, and management literature. While the area of M&A is well-researched in all three subject areas, to date it is unclear what factors actually drive M&A decisions and the specific impacts of M&A deals on shareholder wealth. The core material in the finance and accounting journals tend to provide a quantitative basis for accessing the success or failure of M&A deals. The management journals tend to explore qualitative aspects of mergers. While financial considerations rely heavily on behavioural considerations for their success, we aim to provide an integrated approach to our review.

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Environmental innovation and takeover performance

Hussain,

Tunyi,

Areneke

2024

Bus Strat Env

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Drawing from the resource‐based view (RBV), we examine the effect of environmental innovation on mergers and acquisitions (M&As) announcement returns. Using an international sample of M&As for the period of 2003–2021 and an event study methodology, we document that acquirers with higher environmental innovation—innovative acquirers—earn average deal announcement abnormal returns that are 0.10–0.50 percentage points higher than those earned by their non‐innovative counterparts. These results are consistent across three important forms of environmental innovation (i.e., product, process, and organizational innovation) and are partly explained by the transfer of environmental innovation from the acquirer to the target. We further find that environmentally innovative acquirers are more likely to engage in majority control and cross‐border acquisitions, thus emphasizing the transfer effect. Overall, we contribute to RBV by providing evidence that environmental innovation is a distinctive resource or dynamic capability that is transferable from bidders to targets in the takeover market.

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

Cited by 30 publications

References 74 publications

Firm size, market conditions and takeover likelihood

Firm size, market conditions and takeover likelihood

Mergers and Acquisitions and Multinational Companies: A Review and Research Agenda

Environmental innovation and takeover performance

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