Prediction of Acquisitions and Portfolio Returns

Abstract

In the last decades the forecasting of acquisitions has been subject to increased interest due to its importance for various stakeholders. This study consists of two stages, dealing with the development of acquisitions' prediction models and their use in an investment strategy. More detailed, in the first stage we explore the ability to predict the acquisition of listed firms in the UK. In the second stage of the analysis we explore whether it is possible to earn abnormal returns by investing in portfolios that consist of the stocks of the predicted targets. The training sample includes 658 listed companies half of which were acquired between 2001 and 2005. The validation sample consists of 1,576 listed firms, from which 416 were acquired during 2006. The results indicate that the portfolios can generate abnormal returns ranging from 1.96% (3 months) to 12.24% (12 months).

Keywords: Acquisitions, investments portfolios, predictions

JEL Classification: G11, G34