Relative mispricing and takeover likelihood

Relative mispricing and takeover likelihood

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This paper examines the effect of acquirer likelihood on future stock returns.In sharp contrast to prior findings, acquirer likelihood is a strong and negative predictor of cross-sectional future returns after controlling for target likelihood.If takeover exposure represents a risk premium, the effect on stock valuation should only present in either likelihood measure majicontrast red (acquirer or target likelihood).

This evidence casts doubt on the rational risk explanation, but is consistent with a relative mispricing story.Investors take dragon ball lg disney positions accordingly to explore profits from takeovers.Profits from trading strategy based on takeover probability are concentrated in stocks with high misvaluation characteristics, including small size, value, high momentum, high investment, and low turnover firms, as well as both high and low issuance (or accrual) firms.