Does a Firm's Takeover Vulnerability Cause Its Stock Price to Deviate from Random Walks?
41 Pages Posted: 14 Mar 2011
Date Written: March 14, 2011
This paper examines whether a firm's takeover vulnerability increases the scope of speculative noise trading for its stock. Specifically, the paper tests whether takeover vulnerability overly motivates investors to acquire and trade on private information and thus causes them to react even to non-information as if it were information; if so, then the stock price changes will be serially correlated. Using variance ratio, we find that the hypothesized pattern is indeed borne out by data but it is conditional on the quality of information environment. That is, a stock's deviation from random walks is larger when its takeover vulnerability is greater and its information environment is poorer. In a sufficiently good information environment, on the other hand, there is no evidence that takeover vulnerability causes speculative noise trading. All those patterns are observed only in individual stock returns and not at the portfolio level. The no-result with portfolios implies that the deviation from random walks observed in individual stock returns is driven by a firm-specific component and thus not explained by time-varying expected returns.
Keywords: Takeover vulnerability, Noise trading, Information environment, Random Walk, Variance ratio
JEL Classification: G10, G14, G30, G34
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