Takeovers and the Cross-Section of Returns

Posted: 23 Mar 2009

See all articles by Martijn Cremers

Martijn Cremers

University of Notre Dame

Vinay B. Nair

University of Pennsylvania - Finance Department

Kose John

New York University (NYU) - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: April 2009

Abstract

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.

Suggested Citation

Cremers, K. J. Martijn and Nair, Vinay B. and John, Kose, Takeovers and the Cross-Section of Returns (April 2009). The Review of Financial Studies, Vol. 22, Issue 4, pp. 1409-1445, 2009. Available at SSRN: https://ssrn.com/abstract=1365691 or http://dx.doi.org/hhn032

K. J. Martijn Cremers (Contact Author)

University of Notre Dame ( email )

P.O. Box 399
Notre Dame, IN 46556-0399
United States

Vinay B. Nair

University of Pennsylvania - Finance Department ( email )

The Wharton School
3620 Locust Walk
Philadelphia, PA 19104
United States
215-746-0004 (Phone)
215-898-6200 (Fax)

Kose John

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

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