The purpose of this study is to describe the behaviour of stock market prices around the date, of a takeover offer. Two issues were specifically addressed. First, takeovers are discussed in terms of company investment decisions, and the profitability of these decisions is investigated. Second, the public announcement of a takeover offer is viewed as the release of information about the expected future performance of the companies involved. The stock market's reaction to this release is investigated in the light of the Efficient Capital Markets Hypothesis.
The methodology of the study employs the two-parameter capital asset pricing model developed by Sharpe (1964), Lintner (1965) and others. The estimation procedures for this model follow those used by Ball, Brown and Officer (1975), and the procedure is modified to allow for any possible shifts in the risk parameter.
The companies in the sample of takeover offers are classified firstly as either offerors and offerees, and secondly as to whether or not the takeover was achieved.
The results indicate that any gains arising from the merger are won by the acquired firms at the expense of the acquiring firms, during the merger negotiations.
Four categories of market reaction are described: successful and unsuccessful offerors, unsuccessful offerees and acquired companies. The behaviour observed in three of the four categories is consistent with the Efficient Capital Market hypothesis. However the behaviour displayed by the securities of the acquiring firms is not.
A number of possible alternative interpretations of this anomaly are presented.