Trading of Takeover Target Shares
39 Pages Posted: 20 Aug 2016 Last revised: 23 Nov 2016
Date Written: November 21, 2016
A theoretical model proposed by Cornelli and Li (2002) suggests that informed traders transact in shares of the target firm following the announcement of a takeover. In such cases, takeover traders are incentivised to become large shareholders in the target and, in doing so, influence the outcome of the deal. We investigate the impact of these traders on the success of the takeover empirically using intraday data. In addition to the propositions of Cornelli and Li (2002), we also examine the impact of informed trading on the returns to target shareholders. Overall, we find that a 1% increase in informed trading immediately after a takeover announcement increases the likelihood of takeover success by 12.21%. The same increase in informed trading leads to a 2.59% increase in the one day cumulative abnormal returns accruing to target investors. The increase in abnormal returns attributable to a 1% increase in informed trading is 2.64% higher in successful takeovers than in unsuccessful ones. Our empirical test of the Cornelli and Li (2002) framework accurately predicts the takeover outcome in 70% of cases.
Keywords: probability of informed trading, takeover target, takeover success
JEL Classification: G12, G14, G34
Suggested Citation: Suggested Citation