Open AccessRelative mispricing and takeover likelihood
Author(s) -
Keming Li,
AUTHOR_ID
Publication year - 2021
Publication title -
quantitative finance and economics
Language(s) - English
Resource type - Journals
ISSN - 2573-0134
DOI - 10.3934/qfe.2021031
Subject(s) - stock (firearms) , valuation (finance) , monetary economics , econometrics , accrual , economics , financial economics , stock price , business , maximum likelihood , finance , statistics , earnings , mechanical engineering , paleontology , mathematics , series (stratigraphy) , engineering , biology
This paper examines the effect of acquirer likelihood on future stock returns. In sharp contrast to prior findings, acquirer likelihood is a strong and negative predictor of cross-sectional future returns after controlling for target likelihood. If takeover exposure represents a risk premium, the effect on stock valuation should only present in either likelihood measure (acquirer or target likelihood). This evidence casts doubt on the rational risk explanation, but is consistent with a relative mispricing story. Investors take positions accordingly to explore profits from takeovers. Profits from trading strategy based on takeover probability are concentrated in stocks with high misvaluation characteristics, including small size, value, high momentum, high investment, and low turnover firms, as well as both high and low issuance (or accrual) firms.