Targeting Targets

Abstract

Investing in M&A targets before they receive offers yields high returns on the announcement day. Ours is the first paper to document targeting ability, which is related to the ability of funds to systematically generate such returns in excess of the returns their benchmarks earn from holding targets.  Targeting ability translates one-for-one into fund alpha.  Targeting ability is not due to investment bank or management connections, overweighting small stocks, or industry specialization.  Rather, targeting ability arises from managers moving into targets a year before the takeover, holding more targets, investing more capital in targets, and selecting higher-premium targets.

Keywords: Portfolio management, mutual fund performance, stock-picking ability, managerial skill

JEL Classification: G14, G23