Does a Firm's Takeover Vulnerability Cause Its Stock Price to Deviate from Random Walks?

41 Pages Posted: 14 Mar 2011  

Joon Chae

Seoul National University

Dong Wook Lee

Korea University Business School

Shu-Feng Wang

National Central University, Department of Finance

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Date Written: March 14, 2011

Abstract

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

Suggested Citation

Chae, Joon and Lee, Dong Wook and Wang, Shu-Feng, Does a Firm's Takeover Vulnerability Cause Its Stock Price to Deviate from Random Walks? (March 14, 2011). Available at SSRN: https://ssrn.com/abstract=1785142 or http://dx.doi.org/10.2139/ssrn.1785142

Joon Chae

Seoul National University ( email )

Seoul, 151-742
Korea, Republic of (South Korea)
82-2-880-6929 (Phone)
82-2-882-0547 (Fax)

Dong Wook Lee (Contact Author)

Korea University Business School ( email )

1 Anam-dong 5 ka
Seoul, 136-701
Korea, Republic of (South Korea)
+82.2.3290.2820 (Phone)
+82.2.3290.1307 (Fax)

Shu-Feng Wang

National Central University, Department of Finance ( email )

No. 300, Jhongda Rd, Jhogli City, Taoyuan, Taiwan,
Jhongli, TY 32001
Taiwan
886-3-4227151 # 66261 (Phone)

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