The Relevance of Inflation Adjusted Accounting Data to the Prediction of Corporate Takeovers

Abstract

5354 BARTLEY AND BOARDMAN mathematical models that are useful to investors. For example, Ketz (1978); Norton and Smith (1979) and Mensah (1983) developed bankruptcy prediction models using inflation adjusted data. Of these, only Ketz (1978) found evidence that inflation adjusted data are of greater usefulness than H C data. Baran et al. (1980a) found that CD data are useful for the estimation of systematic market risk, although their findings were disputed by Samuelson and Murdoch (1985). Bar-Yosef and Lev (1983) found no evidence that inflation adjusted accounting data convey useful information about a company's dividend decisions. In contrast, Baran et al. (1980b) and Yang and Vasarhelyi (1985) found that inflation adjusted data could be used to explain bond ratings.In the present study, the usefulness of SFAS 33 disclosures is examined in the context of developing mathematical models that can help investors predict whether a company will be subject to a takeover attempt. Models of this type are of potential value to investors because investments in target companies earn large positive abnormal returns when a merger or tender offer is announced (Jensen and Ruback, 1983).4 In fact, Wansley et al. (1983) demonstrated that a multiple discriminant analysis (MDA) model using H C financial data could predict takeovers with sufficient accuracy for an investor to earn abnormal security returns by investing in companies identified by the model. T H E PREDICTION O F TAKEOVER ATTEMPTS Numerous studies have used financial accounting data as the basis for predicting whether companies will be subject to takeovers or takeover attempts. Prominent examples of studies conducted in the United States and Great Britain include Simkowitz and Monroe (1971); Singh (1971); Nielsen and Melicher (1973); Stevens (1973); Firth (1976); Harris et al. (1983); Wansley et al. (1983); Hasbrouck (1985); Palepu (1986); and Bartley and Boardman (1986). The motivations for these studies include developing classrficatory models for use as investment tools and obtaining a better understanding of the motivations for takeovers. Bartley and Boardman (1986) provide the only direct comparison of inflation adjusted data and HC data in the context of takeover classification. Their primary objective was to determine if the ratio of a company's market value to its inflation adjusted book value (the valuation ratio) leads to more accurate classification of takeover targets than the HC measure of the same ratio. They found that replacing the HC valuation ratio with an inflation adjusted valuation ratio increased the classificatory accuracy of MDA modrls using traditional HC data for the other financial variables. In a similar study, Hasbrouck (1985) also found that the ratio of market value to inflation adjusted book value was important in predicting takeover attempts.The various motives for takeovers suggest a variety of financial characteristics possessed by the ideal target company. Hypothesized motivations for takeovers INFLATION ADJUSTED DATA AND CORPORATE...

Predicting European Takeover Targets

“…A number of researchers (see, e.g. Hasbrouck, 1985; Palepu, 1986; Bartley and Boardman, 1990; Ambrose and Megginson, 1992; Cudd and Duggal, 2000; Espahbodi and Espahbodi, 2003) have shown that certain firm characteristics (variables) are likely to influence the probability of takeover.…”

The identification of acquisition targets in the EU banking industry: An application of multicriteria approaches

“…Nevertheless, a tentative comparison indicates that the range of accuracy in our study is comparable to other studies in acquisitions prediction that employed re-sampling techniques. Bartley and Boardman (1986) achieved a classification accuracy equal to 64% while in a later study (Bartley & Boardman, 1990) they obtained classification accuracies between 69.9% and 79.9%. Similarly, the classification accuracy in the study of Kira and Morin (1993) was equal to 66.17%.…”

“…There are two primary reasons for following this procedure, known as choice based sample. The first is the lower cost of collecting data compared to an unmatched sample (Bartley & Boardman, 1990;Ireland, 2003;Zmijewski, 1984). The second and most important is that a choice based sample provides higher information content than a random sample 9 (Cosslett, 1981;Imbens, 1992;Palepu, 1986).…”

“…Nevertheless, Bartley and Boardman (1990) argue that "matching by size or other variables may be an appropriate control mechanism when the research objective is to examine the statistical significance of individual causal variables" ( p.55) and that "Further, given the lack of a theoretical model, the choice of variables to be matched is inherently arbitrary" ( p. 55). Furthermore, as they point out in an earlier study (Bartley & Boardman, 1986) where firms were matched by industry and size, this procedure reduces the classificatory power of the discriminant models.…”

“…Some of these studies focused on the search of the best predictive variables (e.g. Bartley & Boardman, 1990;Cudd & Duggal, 2000;Walter, 1994) and others on the search of the most effective empirical method for the development of the prediction models (e.g. Cheh et al, 1999;Espahbodi & Espahbodi, 2003;Slowinski et al, 1997).…”