Takeovers and the Cross-Section of Returns

This paper considers the impact of the takeover likelihood on firm valuation. If firms are more likely to acquire when there is more free cash or lower required rates of return, the targets become more sensitive to shocks to cash flows or the price of risk. Ceteris paribus, firms exposed to takeover...

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Bibliographic Details
Published in:	The Review of financial studies 2009-04, Vol.22 (4), p.1409-1445
Main Authors:	Cremers, K. J. Martijn, Nair, Vinay B., John, Kose
Format:	Article
Language:	eng
Subjects:	Abnormal returns Acquisitions & mergers Asset acquisitions Business networks Business structures Capital returns Cash Corporate finance Corporate governance Corporate planning Economic concentration Equity Expected returns Financial portfolios Firm value Investment return rates Investments Investors Law firms Rates of return Risk premiums Shareholders Stock prices Stock returns Studies Take-overs U.S.A Valuation
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Summary:	This paper considers the impact of the takeover likelihood on firm valuation. If firms are more likely to acquire when there is more free cash or lower required rates of return, the targets become more sensitive to shocks to cash flows or the price of risk. Ceteris paribus, firms exposed to takeovers have different rates of return than protected firms. Using takeover likelihood estimates, we create a "takeover factor," buying (selling) firms with a high (low) takeover likelihood, which generates "abnormal" returns. Several tests confirm that the takeover factor helps explaining cross-sectional differences in equity returns and is related to takeover activity.
ISSN:	0893-9454 1465-7368