Abnormal Returns: Takeover Prediction Modelling - Shanghai Stock Exchange

Abstract

Around the Merge and Acquisition (M&A) announcement date, the targets will experience dramatic increases in their share price. The movement of share pricesbrings investment opportunities. To successfully predict the future targets and make an investment strategy, investors can obtain the abnormal return from the increment of the share price. However, many articles of research show that even successfully predicted large numbers of targets, within the investment portfolio, are still unable to show the abnormal return. To make a successful investment strategy, researchers summarized the potential negative factors of the portfolios' return. For example, the investment timing, the distressed firms which share the common characteristics with predicted targets. This paper motivated by the potential improvement space for target portfolio's return, attempts to rationalised a successful investment portfolio. Through selecting the determinate characteristics of targets, building a prediction model, studying its abnormal return and analysing the influence of a distressed firm on the abnormal return, this paper determines that the targets can be distinguished from non-targets with the characteristics of inefficient management, misevaluation, high sales growth, low liquidity and larger free cash flow; consistent with determinant characters, the prediction model has a good predictability; however, good predictability could not produce the abnormal return; furthermore, even the empirical result shows that the target portfolio actually involves a certain percentage of the distressed firms which have significant differences from no-distressed firms, the portfolio can still not obtain abnormal return by screening the distressed firms using its characteristics.