Trading of Takeover Target Shares

Abstract

In this study, we confirm the validity of Cornelli and Li (2002) theoretical model that posits takeover traders affect the outcome of takeover activity. This study uses Australian and United States of America intraday microstructure data for the period 2008 to 2013. Analysing this trading data allows us to improve the identification of informed trading conducted by takeover traders immediately after a takeover is announced. We show that takeover traders play an active role in the takeover process, actively increasing the probability of successful takeover activity outcomes. We show that an increased presence of informed trading in target shares has a positive impact on the cumulative abnormal returns of those shares. We find that a 1% increase in informed trading immediately after a takeover is announced will increase the likelihood of takeover success by 7.42% in Australia and by 12.21% in United States. The same increase in informed trading leads to an increase in target CAR of 2.76% in Australia and 2.59% in United States. In successful takeovers, a 1% increase in informed trading is accompanied by an increase in CAR of 2.64% in United States and 1.21% in Australia. We employ United States data to conduct an out of sample test of our model and find that our model predicts the outcome of a takeover 75.89% accurately.

To confirm our main result, we conduct the same tests using three alternative measures of informed trading established in extant literature: PIN, AdjPIN and VPIN. We find that our main results are robust to the use of these alternative measures of informed trading. These results, however, suffer more from small samples estimation problems than our main results. Show more