australian takeovers ajm 1984

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http://aum.sagepub.com/content/9/1/63The online version of this article can be found at:

DOI: 10.1177/031289628400900105

1984 9: 63Australian Journal of ManagementTerry S. Walter

Australian Takeovers: Capital Market Efficiency and Shareholder Risk and Return

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AUSTRALIAN TAKEOVERS:CAPITAL MARKET EFFICIENCYAND SHAREHOLDER RISK AND RETURN

byTerry S. WalterAbstrract:This paper e:r:plains the shar e rrnr ket. s r esponse to Austrral,ian takeover bids.Both successful, and unsuccessful bids ar e consider ed. TWo issues ar e addr essed.Fir stl,y, takeover s ar e viewed in t e ~ s of c01 porrate investment decisions; thepr ofitabil,ity of these decisions to the offer ee and to the offe1 or ar einvestigated. Secondl,y, takeover bids ar e seen as a valuabl,e sour ce ofinfo Y l l rZtion r el,evant to the deteromination of a fi1 m. s shar e rrnr ketcapital,isation. The adjustment of sha1 e pr ices to this info Y l l rZtion sour ce sstudied within the context of the Efficient Mar kets Hypothesis. The r esul,tsindicate that offer ee shar ehol,der r etu1 nS ar e no Y l l rZl, Or bel,ow no Y l l rZl, proior to abid; wher eas offer or s exhibit above averrage r etu1 ns. When a bid s rrnde, offer eeshar ehol,der s typical,ly r eceive significant positive excess r eturons; wher easoffer or shar ehol,der s gain no additional benefit. Austrral,ian shar e rrnr kets ar e

o ~ i ~ e d to be semi-str ong eff ic ient in the Farna sense, namel,y that info Y l l rZtionrrnde publ,ic duroing takeover negotiations s rrapidl,y and without bias inco1 porratedinto shar e proices.Keywo1 ds:TAKEOVERS; EFFICIENT MARKET HYPOTHESIS; RISK; SHAREHOLDER RETURN;ASSET PRICING; MERGERS

Department of Accounting, University of New South Wales. This paper i s drawnfrom my Ph.D. thes is t the University of Western Austral ia . The study wasinspired by Professor Phi l ip Brown whose comments and encouragement aregr teful ly acknowledged. The comments of par t ic ipants t workshops t theAustra l ian Graduate School of Management, the University of Queensland andthe University of Western Austral ia and those of examiners and a reviewer arealso acknowledged, in p r t icul r R Bal l , P. Dodd, G Foster , F. Finn andR Officer. The usual exclusions apply.

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WALTER TAKEOVERS

or reform i s required to protect the i n t e r e s t s of shareholders whose ownershipclaims are acquired. In contras t , t has been argued that managerial se l f - in te res t i s the primarymotivat ion in takeovers;6 that management engages in takeovers to maximise f irms ize ra ther than shareholder wealth. Acquir ing f irms are supposed to earn excessnegat ive re turns . I t i s argued tha t management re ta ins i t s pos i t ion due tosepara t ion of ownership and contro l . Managerial behaviour as hypothesised in thedevelopment of the ' t r a d i t i o n a l ' se l f - i n t e r e s t motive can occur only whenbreakdowns exis t in the market for corporate contro l or the managerial labourmarket. Clearly, separat ion of the managerial decision-making-funct ion and ther isk- tak ing funct ion can and does eKist without managers pursuing non-valuemaximising behaviour. 7Between these extremes l i e s the not ion of an acquis i t ions market , or market forcorporate contro l , where competi t ion among bidding firms works to ensure t ha tbargains ex ante do not ex is t . Pr ices paid in takeovers are such tha t theexpected re turn from an acquis i t ion i s commensurate with the level of r i skinherent in the inves tment . 8 This represents a specia l , and perhaps unrea l i s t i c ,case of a compet i t ive acquis i t ions market hypothesis . Suppose synerg is t icbenef i ts from an acquis i t ion are spec i f i c to a par t i cu la r offeror . Here thesuccessful of fe ror , facing a competi t ive market for acquis i t ions , wi l l pay a tl eas t the value of the ta rge t to any a l t e rna t ive bidder . Hence the exis tence ofa compet i t ive market does not necessar i ly imply normal returns for an of fe ror .Clear ly some of fe rors do earn abnormal re turns in acquis i t ions .

n t e ~ Z ~ f i c i e n c y IE) HypothesisDodd and Ruback (1977, p.354) argue:

the hypothesis contends tha t the asse t s of the t arget firm were not beingut i l i s ed e f f ic ien t ly prior to the takeover offer . The bidding firm i sassumed to be motivated by informat ion on the ine f f ic iency Whatever theor ig ins of the ine f f ic iency , the announcement of a takeover i s received aspos i t ive informat ion for the ta rge t fi rm, i r respec t ive of the outcome ofthe offer .

Mergers may thus be viewed as a cap i t a l market mechanism to remove resources fromthe monopol is t ic cont ro l of firm managers who are under-uti l is ing them tocompeting f irms which can use them more ef fec t ive ly . I r respective of the or ig insof the exis t ing under-u t i l i sa t ion , the unant ic ipated announcement of a takeoverpos i t ive (negat ive) re turn i s also referred to in th i s paper as a gain ( loss) .Several a l t e rna t ive terms are found in the f inance l i t e ra tu re to describe returnsgrea te r ( l ess ) than those expected for a given l eve l of r i sk . These includeabnormal re turn , abnormal performance and above-average returns. See, Fama(1970, 1976), or Foster (1978).5. Chambers (1973) s t rongly advocates the case for the reform of the qual i ty ofaccounting informati.on.6. See, Mueller (1969), but see a lso , Grabowski and Mueller (1975).7 . See, Fama (1980).8. See, Mande1ker (1973) .

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bid usual ly increases the market cap i t a l i sa t ion of the offeree because tincreases the expected value of shareholder fu ture wealth. Four out of f ive bidsare successful and for the one that i s not , unless permanent barr iers to anof fe ree ' s acquis i t ion are erected in response to the bid, i t s marketcap i t a l i sa t ion should also increase. The reason i s tha t the probabi l i ty ofreceiving a second (successful) bid a t a future date condi t ional on anunsuccessful bid now, exceeds the uncondi t ional probabi l i ty . lOThe impl icat ions of the in te rna l e f f ic iency hypothesis for offeror returns areless c lea r , and depend on the market 's evaluat ion of the offer price and newinformat ion re leased in the bid . Dodd and Ruback explain (1977, p.354):

i f information of the ta rge t f i rm's ine f f ic iency i s publ ic ly ava i lab lepr ior to the of fe r , compet i t ion in the acquis i t ions market would implynormal re turns for the bidding f irms. f the information is not publiclyava i lab le pr ior to the of fe r and i s not re leased during the of fe r , pos i t iveabnormal returns wil l be rea l ised by bidding f irms Which are successfu l .Those bidders whose offers are unsuccess fu l . . . can experience abnormallosses as resources are diss ipated .11

2 T KEOVER OFFERS ND SH RE PRI E DJUSTMENTSFor any takeover offer , a bid price ( including costs)12 can be envisaged wherethe expected re turn to the offeror i s that normally expected for the r i s kinherent in the acquis i t ion . At such a pr ice , the acqui r ing f i rm's shareholderscan expect no excess return in an ef f ic ien t market. By contras t , a bid price canbe contemplated tha t i s above or below the normal, or equi l ibr ium, l evel . Anumber of quest ions then follow. For example, what returns can a shareholder ofan of feror firm expect on the unant ic ipated announcement of a takeover? Whatre turn i s expected for an offeree firm? Are the returns condit ional on the bid ' ssuccess?The answers to these quest ions depend on the market ' s in te rpre ta t ion of theimpl icat ions of the bid, and the speed with Which any information re leased by theof fe r i s incorporated in to share pr ices .

~ f h e r e - e x i s t in Aust ra l ia , l eg i s l a t ive barr iers which r es t r i c t some f i rms 'entry in to the takeover market. See, for example, the Companies (Fore ignTakeovers) Act 1972 and the Trade Prac t ices Act 1974. Further , Austra l ianl eg i s l a t ion re s t r i c t s takeover ac t iv i ty in indus t r ies such as banking,broadcast ing and te lev is ion and t rus tee management.10. See p.79.11. The acquis i t ion cost on announcement for an eventual ly successful offerorincludes the discounted probabi l i ty that the bid wil l f a i l and that cer ta in cos ts(e .g . l ega l expenses, auditing fees, the cos t of managerial time and the cos t ofcomplying with the information requirements of the legal system and stockexchange l i s t ing) wi l l be incurred for no re turn. These probabi l i t ies arerevised as the progress of the bid becomes known to investors . See pp.85-7.12. Smiley (1976) est imated the cost in the u.S. of a takeover ( including thebid premium and managerial t ime) is of the order of 15 percent of the bid price.

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The ffieient Mapket Hypothe i EMH)In an ef f ic ien t market, prices respond rapidly to informat ion. 13 Fama 1970) 14iden t i f i e s th ree forms of the EMH depending on the par t icu lar information se tassumed to be ava i lab le to the market. In i t s weak work the information set i sconfined to the pas t se r i es of share pr ices ; in the semi-s t rong form, theinformat ion set i s publicly ava i lab le informat ion; and in the s t rong form, theinformat ion se t i s a l l informat ion re levant to the pricing of a secur i ty .According to the EMH ( in the semi-s t rong form), when information inherent in atakeover announcement becomes publ ic ly ava i lab le , share prices ins tantaneouslyadjus t . The EMH does not rule out the poss ib i l i t y of excess returns accruing expost to the shareholders of e i the r the acquir ing firm or the acquired f irm. I tpredic t s tha t market prices react immediately and without bias ( L e . t radedpr ices are equi l ibr ium prices) to the news of a takeover bid.J . PREVIOUS EVIDENCEThe empir ical evidence discussed in t h i s paper i s conf ined to those s tudies whichhave employed models derived from the two parameter asse t pricing model developedby Sharpe (1964), Lintner (1965), and others . These s tudies are summarised inTable 3.1. Excel lent discussions of e a r l i e r evidence are provided by Hogarty(1970a), Dodd (1975), Henderson (1974), and Mueller (1977).Hogarty (1970a, p.389) concluded his survey of ear ly merger his tory (coveringmergers in the period 1904-1960), thus:

what can f i f ty years of research t e l l us about the prof i t ab i l i ty ofmergers? Undoubtedly the most s ign i f i can t r esu l t of t h i s research has beent ha t no one who has undertaken a major empirical study has concluded tha tmergers are prof i tab le , L e . prof i tab le in the sense of being moreprof i tab le than al ternat ive forms of investment. A host of researchers ,working a t dif ferent points of time and ut i l i s ing dif ferent analyt i ctechniques and data , have but one major dif fe rence : whether mergers have aneutra l or negat ive impact on prof i t ab i l i ty .

I s th i s conclusion still val id for the evidence of the 1970s? Certainly, as i tre la ted to Austral ian research on acquir ing f i rms, it appears to be. Dodd (1976)repor t s s ign i f i can t post announcement losses for of fe rors , resu l t s which areanomalous with respect to the EMH. In con t ras t , major s tudies undertaken in theUnited Sta tes by Mandelker (1974), El le r t (1976), and Dodd and Ruback (1977)suggest tha t the United Sta tes share market i s e f f ic ien t with respect to theinforma t ion inherent in takeove r announcement. They are also cons i s t en t wi ththe In ternal Efficiency Hypothesis .Studies summarised in Table 3.1 produced cons is ten t resu l t s for the acquiredfirms. Typical ly , af te r a period of excess negat ive re turns , they exper iencegains in the period leading up to and including the takeover announcement date .Halpern (1973), Mandelker (1974), Dodd (1976), F;l lert (1976), Fir th (1976),13. St r i c t l y s t a t ed , the hypothesis i s that share prices are cont inuously inequi l ibr ium; tha t i s to say, the expected re turns condi t iona l upon act ing on anassumed informat ion se t are the same as the uncondi t iona l re turns , ce te r i sparibus.14. Cf. Grossman (1976).

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Franks, Broyles and Hecht (1977), and Dodd and Ruback (1977) found similarpatterns for the CARs; patterns which are consistent with market efficiency.Substantial gains in takeover negotiations are won by the shareholders of theof feree f inn.An obvious question arises when comparisons are made between the results of themore recent studies (based on r isk-adjusted shareholder returns) and the previousin general, accounting-based) research: 15 can the conflict ing results beattributed to the differ ing modes of analysis?

I t seems that a study of the same sample in both modes is unlikely to resolveth is issue as accounting numbers, under present accounting practice, are not ableto eff ic ient ly address questions on the timing of wealth changes. Schwert (1982)argues that wealth changes could be isolated i f accountants reported the economicreplacement cost of the finn. In general, because accountants report thehis torical costs of individual assets , i t is not possible to tEasure wealthchanges associated with say a takeover by relyirg on these data. Even i f currentvalues reported conceptual problems exis t . lThe empirical evidence reviewed in th is section, with the exception of Firth(1976), was based on samples of the to tal population of takeover offers . Some ofthese samples are selected with bias, for example, larger companies [Mandelker(1974), Dodd (1976), Ellert (1976)].17 Most researchers have res t r ic ted theirat tent ion to successful takeovers [Halpern (1973), Mandelker (1974), Eller t(1976), Firth (1976), Franks, Broyles and Hecht (1977)]. A population ofAustralian takeover offers, i r respective of the outcome is used in this study.4 D T ND METHODOLOGY4 1 Data

All 572 takeover bids for more than half the outstanding ordinary shares of theofferee, being an Australian l i s ted company and made between 1 January 1966 and31 December 1972, are included in th is study. The bids were identif ied fromWalker (1973), a schedule of delis ted firms prepared by the Sydney Stock ExchangeLimited, and tables published in The Australian Financial Review. Each bid wasclass i f ied as successful or unsuccessful, with success being defined as obtaininga controll ing in teres t (greater than half the offeree s ordinary shares).18IT:Accounting -based studies which suggest takeovers are unsuccessful foracquirers include: Reid (1968), Poindexter (1970), Laiken (1972), and Kuehn(1975). A considerable amount of empirical evidence has been published since thecut-off date for review used in the thesis on which this paper is based. Thisevidence is reviewed in Jensen and Ruback (1983).16. See, Schwert (1982, pp.146-147).17. A reviewer correctly points out that since no one has incorporatedheld and unlisted companies, l l studies suffer from a size bias.acquisitions are undoubtedly more important for economic management;l ikely to involve large firms.

privatelyCertainthese are

18. This cri ter ion is necessarily subjective. Note, however, that completeacquisi t ion of offeree shares occurred in 251 of the 271 bids classified assuccessful. I t could be argued that the choice of fif ty percent misclassifiedsome offerors as unsuccessful, Le . , that control can be eKercised without8

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There were 271 successful bids where both firms involved were l i s t ed , 112successful bids where only the offeree was l i s t ed , 97 unsuccessful bids whereboth par t i es were l i s t ed and 92 unsuccessful bids where only the offeree wasl i s t ed . Table 4.1 gives the time d i s t r ibu t ion of bids that were iden t i f ied .Table 4.1 i s based on the announcement date of a bid, which i s assumed to be thedate the bid was f i r s t publ ic ly known. These dates were collected from TheAustra l ian Financia l Review, as also were the dates on which successful of fe r swere declared uncondi t ional . 19Weekly clos ing share prices , adjusted for changes in the bas is of quotat ion,20were col lec ted for the period January 1964 to 31 December 1974 for a l l firmsinvolved in successful bids and offerors whose bids were unsuccessful . Adjustedprices 26 weeks e i the r s ide of the announcement of the bids were collected forofferees involved in unsuccessful bids . These data were screened for possibleerrors by verifying a l l weekly returns greater than 20 percent in absolute value .The primary sources for share price data were the of f i c i a l dai ly l i s t s of theSydney and Melbourne stock exchanges. I f a firm was not l i s t ed on theseexchanges, i t s share prices were col lec ted from The Austral ian Financia l Review.The methodology also requires ra tes of re turn on a r i sk- f ree asset ; andpreferably on an asset of one week matur i ty , s ince the share price data areweekly. Such an asse t i s not read i ly ava i lab le in Austral ia for the periodinves t iga ted . As a close subs t i tu te , the re turn on a 13 week (90 day) Austra l ianTreasury Note, which was the shor tes t term governmental (and thus vi r tua l lyr iskless) secur i ty on i ssue during the whole of the inves t iga t ion period, waschosen. The t ime se r i es was supplied by the Reserve Bank of Austral ia .4 2 ethodoZogyThe ana lys is i s conducted within the framework of the two parameter asse t pric ingmodel developed by Sharpe (1964), Lintner (1965), and others from the seminalwork of Markowitz (1959). Black s (1972) vers ion of the model s ta tes t ha t a s se t swi l l be priced in equi l ibr ium according to the fol lowing:21,22

majori ty ownership. The empirical importance of th is class i fy ing rule could beassessed by s t r a t i f i ca t i o n of unsuccessful t ransactions by proportion acquired.Data for such a t e s t was not or ig ina l ly co l l ec ted , and subsequent attempts provedf ru i t l e ss .19. Most Austra l ian takeover bids were made condi t ional on a minimum acceptancelevel ( f requently 90 percent, as Austra l ian company law allows compulsoryacquis i t ion of dissent ing shareholders holdings iE 90 percent i s achieved). Insuch cases the uncondit ional date i s normally the date acceptances to ta l 90percent , and can be regarded as the ul t imate confirmation of the success of thebid. Austral ian Associated Stock Exchange Lis t ing Requirements (1978) requi reshares of the of fe ree to be removed when 90 percent acceptance i s achieved. Thisdate i s , on average, 5 weeks aEter the announcement date .20. As i s customary with share price r e la t ive f i l e s , the dividend adjustment wason a pre- tax bas is .21. For proof of th i s model see, Black (1972) and Jensen (1972).22. Tildes ( - ) denote random var iab les .

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4.1)where expected one-per iod) r a t e of re turn on asse t i ,

expectedweightedeconomy,

re turnre turn

on the market por t fo l io , L e . , aon the por t fo l io of a l l as se t s

valuein the

expected re turn on an e f f i c i e n t l y divers i f ied por t fo l io whosereturns are uncor re la ted with those of the market por t fo l io ,and

- - 2 -cov Ri,Rm)/a Rm) represents the r i sk of asse t i re la t ive of the t o t a l r i sksof the market m.

Defining Bi = cov Ri,Rm) / a 2 Rm) the model implies that E Rit) ( the expectedre turn on an asse t i in period t i s equal to E Rz t ) ( the expected re turn ona por t f o l io which i s r i sk less with respect to the market por t fo l io) , plus a r i skpremium, t ha t i s [E Rmt ) - E(Rzt) jRit . Thus the re la t ionship between theexpected re turn on an asse t and i t s r i sk covar iance with the market por t f o l io ) ,predic ted by (4 .1) i s l i near . Fur ther cov Ri,Rm) i s the only term in (4 .1)t ha t i s unique to asse t i and hence t alone accounts for di f ferences ina s s e t s expected re turns . These predic t ions have been the subject of deta i ledt e s t ing . 23Suppose there e x i s t s a r i sk - f r ee asse t , with a s ingle-per iod r a t e a t which a l linves tors can borrow or lend unlimited amounts. This yields a spec ia l case of(4 .1) :24

(4.2)where Rf = the return on the r i sk less asse t .Equat ion (4 .2) i s s ta ted in terms of expected re turns , which must be replacedwith rea l ised returns in empirical appl ica t ions :

(4 .3)

where Uit a res idua l or the excess re turn of secur i ty i in per iod t , whichi s assumed to be uncorrelated with the market re turn .The rea l ised return for a secur i ty (Ri t ) containsinformat ion concerning secur i ty i generated duringthe re turn which i s not accounted for by the re turnsecu r i t i e s [captured in Rf t , Rmt - Rft) and ~ t jres idua l Uit providing

the t o t a l adjustment toper iod t . That par t ofin te r - re la t ionsh ips amongw i l l be observed in the

i . the event being inves t iga ted is independent of Rft and Rmt

23. -See, in par t i cu la r Black, Jensen and Scholes 1972), Fama and MacBeth 1973),and Bal l , Brown and Off icer 1976); but see Rol l 1977).24. See, Sharpe 1964) and Lintner 1965).

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ii the re la t ive r i sk of secur i ty i i s not affec ted by the event beingi nves t i ga t ed .

I f takeover act i v i t y were not independent of general market movements, thedis turbance term could not be in te rpre ted as captur ing en t i re ly the reac t ion ofshare prices to the speci f ic event being inves t iga ted . Since it has beensuggested tha t high takeover ac t iv i ty i s assoc ia ted with buoyant market -widecondi t ions ,25 the observed dis t r ibu t ion of takeover bids per week i s presentedbelow. 26There are ind ica t ions in Table 4.2 tha t there i s some peaking of takeoverac t iv i ty in the data ; and therefore tha t the re a re dependencies through t ime. 27The quest ion of independence between takeover ac t iv i ty and market re turns wasa l so invest igated through corre la t ion analys i s . The frequency of takeovers inthe 28 three-month periods for which data were collec ted was corre la ted withRft, Rmt and Rmt - Rft) . The derived Pearsonian cor re l a t i on coef f ic ients were-0 .02 , 0.10 and 0.10 respec t ive ly . None of these i s s ign i f i can t a t the 5 percentconfidence l evel . Thus while takeover ac t iv i ty i s associa ted with t ime, theindependence assumptions needed to est imate 4 .3) are probably suf f i c ien t ly wel lmet fo r the purposes of th i s study.There i s evidence to suggest tha t takeovers are associated with changes inr i sk . 28 This can be expected as a takeover normally resul ts in changes inf inanc ia l gear ing and the asse t mix. To allow for possible r i sk changes,i s est imated using ra tes of re turn for the period t -n*) to t -1) , where n* i sthe number of ra tes of re tu rn used to es t imate ~ i t 2 9 via equat ion 4.4) .

R - Ri , t - n f , t - n 4 .4)n 0, 1 , 2, n*

25. See, Nelson 1959), Bushnell 1961), Walker 1973) , Kuehn 1975), and Stewart1977).

26. Table 4.2 summarises 479 bids , whereas the t o t a l number of bids invest igatedin th is s tudy i s 572, which includes mult ip le bids for the same offeree . Theda ta in Table 4.2 exclude a bid by a di f fe ren t offeror for an of fe ree which hadreceived a bid in the previous 10 weeks.27. A chi-square s t a t i s t i c was ca lcu la ted under the nul l hypothesis tha ttakeovers were generated independently through t ime according to a Poissonprocess . The resul tant chi-square s t a t i s t i c was 15 .7 . Were the nul l hypothesist rue , the probab i l i ty of observing a sample chi-square s t a t i s t i c of 15.7 or more,i s less than 0.005.28. See, Mandelker 1974), Dodd 1976) and E l l e r t 1976).29. The optimal est imat ion period n* was determined by examining the meanpredic t ion e r ro rs , mean squared pred ic t ion e r ro rs and mean absolute pred ic t ioner rors for various n in the range 20 to 175 using a l l da ta in the f i l e . Thesere su l t s ind ica ted there i s l i t t l e to choose between est imates using 50 and 100weekly observat ions . The re su l t s reported below employ est imates of usingthe 100 pr io r observat ions . Note however t ha t re su l t s are robust with respect to

es t imat ion techniques. See, for example, Walter 1980), Appendix B.7



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The estimated systematic r i sk coeff ic ien t in (4 .4) , Bi t was calculated usingordinary l eas t squares regression. The ( f inn-speci f ic) excess return in periodt i s then given by:

(4.5)Excess returns are averaged across secur i t ies for each week t , which i s definedr e la t ive to the week in which a takeover bid i s announced. Week t , which i snot the same chronological week for a l l secur i t i e s , i s allowed to vary over arange (such as 100 weeks before and a f t e r the week in which the event takesplace) . That i s ,

AR t (4.6)where N is the number of takeover bids. Average excess returns are thencumulated through the period inves t iga ted (from k weeks prior to the event dateto the end of any period t), so tha t :

CAR tt

l ARt=-k t (4.7)I t i s noted tha t the methodology carr ies with it two important qual i f ica t ions:a. three hypotheses tha t (4.3) i s descr ip t ive ly valid , that the market i s

e f f i c i en t , and tha t takeovers have infonnation content are jo in t ly tes ted;and

b. theore t ica l ly , m i s the value-weighted index of ex ante one-periodreturns on a l l assets in the economy.

In empirical inves t iga t ions , a surrogate index must be used. The index chosenfor the r esu l t s presented below i s an equally weighted average of a l l ra tes ofreturn in the f i l e , with the following exclusions:i . for of fe ree companies, data for the 26 weeks prior to a takeover

announcement are excluded; andii. for offeror companies, data for the three years prior to a takeover

announcement are excluded.There are , on average, 193 ra tes of return per week in th i s index. Dodd (1976)reported excess posi t ive returns of 37.1 and 25.3 percent over the s ix monthspr ior to a bid s announcement for the 58 acquired and 14 not acquired firmsrespect ively.30 His r esu l t s were re l ied on for the exclusion period for offerees .The offeror exclusion period was based on an inspect ion of the CAR and ARs fora l l offerors and successful offerors derived under the assumption tha t fl=1. 31These resul ts revealed that offerors experienced excess posi t ive returns over a30. Prior to the six IIDnths, the monthly ARs were small and independentlydis t r ibu ted around a mean of zero.31. In the absence of information about a speci f ic securi ty, th is assumptionprovides an unbiased est imate of i t s r e la t ive r i sk . The index used for t h i s t e s temployed data for a random select ion of 50 f inns and i s described in Brown andWalter (1974).

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per iod of approximately three years pr io r to a takeover announcement. Thisperiod was excluded in the ca lcu la t ion of the index to compensate for thesystemat ic se l ec t ion bias which ex is t s in the t o t a l data f i l e .5 RESULTS OFF R SResul ts are presented in th i s and the next sec t ion , in a standard format, asfol lows.

a . A t ab le i s given which contains the Average Residual AR) , the CumulativeAverage Residual CAR), the to ta l number of observat ions 32 in the AR thenumber of negat ive and pos i t ive res idua ls excess re turns ) , a z - s t a t i s t i cand i t s re la ted binomial probabi l i ty discussed e l o w ~ ~ and the average betaof f irms that have a res idua l in a par t icu lar per iod.

b. Two f igures are included, the f i r s t of which presents the time ser ies plo tof the CAR and the second of which gives the t ime ser ies plo t of theest imated beta of shares in the category i r respec t ive of whether they have ares idua l in a par t icu lar period. 34

c . There i s a table of summary s t a t i s t i c s from the Wilcoxon t e s t discussedbelow)

d. The r esu l t s in a) , b) , and c) are discussed.Signifioonce TestsThe s t a t i s t i ca l s igni f icance of the sign of the week-by-week res idua l i sdetermined using a binomial t e s t . 35 As the number of observat ions increases , thebinomial d i s t r ibu t ion the sampling d i s t r ibu t ion of the proport ions observed inrandom samples drawn from a two-class populat ion) tends towards the normald i s t r ibu t ion . 36For a populat ion having equal proport ions of pos i t ive and negative res idua ls , the ,repor ted probabi l i ty i s tha t of the sample proport ion of posi t ive res idua lsdi f fer ing from 0.5 by a t l eas t as much as the difference observed.

32. The number of observat ions i s genera l ly l e s s than the populat ion s ize becauseof missing pr ice r e la t ives .33. These are ca lcu la ted using the 100 previous r a t es of re turn .34. This procedure was adopted to preventin t roduced in to each moving be ta se r ie s . Noteconducted on the mean of the est imated betasofferees and offerors , and accordingly s ta tementsonly to the ca lcu la ted averages.

a r t i f i c i a l f luctuat ions beingthat no s igni f icance t e s t wasfor the various ca tegor ies ofabout movements in beta r e l a t e

35. The t e s t i s described in Siegel 1956, pp.36-42).36. Mood and Graybi l l 1963). The approximation i s general lyreasonable when the number of observat ions i s grea te r than 25.1956).

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I t could be debated whether the null hypothesis i s appropriately one of equalproportions. Brown and Hancock (1977) report that 49.4 percent of the non-zerodaily rates of return in the 4 days preceding and 5 days following the effect iveannouncement date of a profi t report are posit ive. Similarly Brown Kleidon andMarsh (1980) report that 46.5 percent of the CRSP daily excess returns areposi t ive. The conclusion is that the binomial tes t as applied may be biased infavour of rejecting the null hypothesis, because the population proportion ofpositive excess returns is possibly s l ight ly less than a half . Any bias will besmall , because i t can be shown that the binomial tes t is not part icularlysensi t ive to moderate changes in the population proportions.The Wilcoxon t es t i s applied to tes t the significance of the observed movementsin the CAR over longer time intervals. A major purpose of this study is toestimate the effect of takeovers on shareholder returns. As explained in theprevious section the methodology used involves averaging excess returnscalculated according to equations (4.5) and (4.6) . Because these excess returnsare ex post observations of random variables , the average alone i s not suff ic ientto reach inferent ia l conclusions about the true mean. A significant t es t i s alsoneeded.The parametric t - s ta t i s t i c is not obviously appropriate in this context becausei t seems unlikely that excess returns are ident ical ly distr ibuted across time andacross securi t ies . 7 The signif icance tes t adopted here is the non-parametricWilcoxon Matched-Pairs Signed-Ranks Test (hereinafter the Wilcoxon t es t . TheWilcoxon t es t does not assume ident ical ly distr ibuted returns, though i t doesassume independence and symmetry.38The Wilcoxon tes t involved the selection of two control shares 9 for each shareinvolved in a takeover offer ( the sample firm). Each sample share is matchedwith a control por tfolio such that they are of identical r isk . Under theassumption that the sample share s involvement in a takeover offer was the onlysystematic difference between i t and the control por tfolio, the differencebetween their cumulative rates of return i s an unbiased estimate of the effect ofthe takeover. For estimation eff iciency reasons t was deemed that each sharemust

t . have at leas t 90 percent of i t s price relat ives available over theinvest igat ion period, and

37. See, Bal l , Brown and Officer (1976). Since the computing was conducted forthis paper accepted methods of s ta t is t ica l analysis have undergone considerablechange. This change towards the use of t s ta t i s t ics in significance test ing canbe attributed to the analysis conducted by Brown and Warner (1980).38. See, Siegel (1956, pp.75-83). The t es t i s applied to continuously compoundedreturns to conform better with the symmetry assumption. Cf. Brownlee (1956).39. Two acceptable control shares ( the ones with immediately above and belowthe sample) were used for each share, to guarantee estimated betas that wereident ical . This procedure was adopted to overcome a possible problem in applyingthe Wilcoxon test : matching of control and sample shares on may resul t insignificant differences in average betas occurring by chance. The weights usedto equate portfol io estimated betas with sample ~ i S were applied to individualcontrol security returns to determine the weekly return of the control portfol io.

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ii. not be involved in a takeover of fe r in the period 100 weeks e i t h e r s ide ofthe sample sha re ' s announcement date before it was considered acceptable asa contro l share .

The nul l hypothesis i s tha t the sample and i t s contro l a re drawn from the samepopulat ion, and the Wilcoxon probab i l i ty repor ted i s the ( two- ta i led) probab i l i tyof observing the (s igns and ranks of the) cumulative ra tes of re turn on thesample shares and the i r respect ive cont rols , i f the nul l hypothes is were t rue .These probab i l i t i e s are reported for

1 . the period -100 to -1 , t ha t i s , the pre-announcement period excluding theannouncement week;

ii. the period -100 to 0 , tha t i s , the t o t a l pre-announcement period includingthe announcement week; and

iii. the post announcement period, tha t i s , +1 to +20 ( fo r offerees)40 and +1 to+100 ( fo r o f fe ro rs ) .

In addi t ion , the number of cases in which acceptable pairs were found and thedifference in the average re turn between each sample and cont ro l por t fo l io a rerepor ted for each inves t iga t ion per iod. When the difference in the averagere tu rn i s mult ipl ied by the number of weeks in the inves t iga t ion period, ana l t e rna te ( t o the CAR measure of excess re turns i s der ived . 41Resul ts are presented for the following groups of offe rees :

1 . All 572 offe rees which received a takeover bid during the inves t iga t ionper iod, tha t i s , from 1 January 1966 to 31 December 1972 (Table 5 .1 .1 ) .2. All 383 offerees which were successful ly acquired 42 (Table 5 .2 .1 ) .3. All 189 offe rees which were not acquired (Table 5 .3 .1 ) .

40. The Aust ra l ian Associated Stock Exchange Lis t ing Requirements s t ipu la te anoffe ror must not i fy the exchange as soon as acceptances reach 90 percent . Theshares of the offe ree are then removed from t rading. Consequently, the number offirms for which data ex i s t , in the category of successful ly acquired offe rees ,drops from 215 on announcement to 51 in week +20. See Table 5.2 .1 .41. While the Wilcoxon t es t i s unbiased, the cumulat ive mean difference betweenthe sample and contro l r a t e s of re tu rn ( i . e . , the sample re tu rn l e s s pa i r re tu rnaveraged refer t ables , following) can depart subs tant ia l ly from the CARcomputed over the same period. The reason i s tha t the variance of the CAR i sapproximately N t imes the variance of the AR, where N i s the number of weeksover which the ser ies i s accumulated. Since the variance of the AR var iesinverse ly with the number of shares used to compute it departures can be

substan t ia l in smal l samples. See, for example, Table 6.3 .1 and 6.3 .2 .42. Success is def ined as gaining contro l of more than 50 percent of theoutstanding ordinary shares of the offeree .

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5 1 All O f f e ~ e eTable 5.1 .1 . presents resul ts for 572 separate bids where a separate bid i sdefined to include the case of a different offeror bidding for the same offeree.The CAR accumulates 5.5 percent in the per iod -100 to -10. In t h i s period 45 ofthe ARs are negative, 46 are posi t ive. In 8 of the 91 weeks the z - s t a t i s t i c forthe binomial t e s t i s s ignif icant a t the 0.05 confidence level ; perhaps notsurpr i s ingly , the proport ion of posi t ive res iduals i s less than half in each ofthe 8 cases .In contras t , the ARs in the period -9 to -0 are uniformly posi t ive; four of thez - s t a t i s t i c s are s ignif icant a t the 0.05 confidence l evel . The CAR r i ses 27.7percent during th i s period; 12.9 percent of t h i s r i s e occurs in week O. Eightypercent of the residuals in week 0 are posi t ive . Indeed, the probabi l i ty ofobserving the dispropor t ionate ly high number of posi t ive res iduals in e i ther weeklor week 0 i s very close to zero. Note tha t the binomial t es t in th i s case i si f anything biased agains t re jec t ing the nul l hypothesis.

After a period of about normal return ( in the period -90 to -40 the CARdeclines one-half percent) offerees show sharp r i ses in excess posi t ive re turns .The Wilcoxon t es t indicates tha t the probabi l i ty of the difference between thesample and control excess re turns being as large as tha t observed under the nul lhypothesis tha t each sample and i t s control are drawn from the same population,i s less than one in one thousand.Some of the average excess return in the immediate pre-announcement period isexplained by the entry of competing offerors . 43 The resul t s in Table 5.1.1 r e l a t eto 572 separate b ids , where a separate bid includes the case of a differentofferor bidding for the same offeree. 44 The average excess return may also inpar t be associa ted with market purchases by the offeror prior to the announcementof the bid, or to inves tor ant ic ipa t ion of an imminent of fe r . Takeover bidsundoubtedly involve a period of planning by the offeror and information may bereleased during th i s planning stage.After a takeover bid announcement the CAR increases by a fur ther 1.9 percent ofwhich 1.5 percent occurs in week +1. The week +1 res idual could be associa tedwith non-trading. 45 I f a bid is announced in a par t icular week af t e r the l a s tsale in the data f i l e , the res idual of week +1 captures the market adjustment toinformation which became avai lable in week O. Thus a posi t ive AR in week +1,even were it s ignif icant , should not be regarded as evidence of a slow react ionto the news of a takeover bid . In any event the Wilcoxon t e s t computedprobabi l i ty of 0.433 for the period +1 to +20 suggests tha t any differences inreturn between the sample shares and t he i r respect ive controls could eas i ly bedue to chance. Further , no z - s t a t i s t i c in th i s period i s s igni f icant a t the 543. El iminat ing competing offeror bids made in the previous 50 weeks) for thesame offeree reduces the number of cases in t h i s category to 442. This re su l t sin vi r tua l ly no change to the general tenor of the reported sample, save theobvious reduction in numbers of observat ions . These s ing le bid ' resul ts areavai lable on request to the author.44. There were 93 cases in which there was a bid by a different offeror for anofferee which had received a bid in the previous 10 weeks ( re fer Table 4.2).45. Non-trading in week 0 wil l bias the Wilcoxon t e s t towards re jec t ion of thenul l hypothesis in the per iod (+1; +20).

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percent confidence leve l .The t ime se r i e s plo t o f the moving beta se r i e s Figure 5 .1 .2 ) reveals 11 t t l echange in the average ~ fo r t h i s group.46 Average computed beta var ies between0.92 and 0.87 in the pre-announcement period and f a l l s to 0.82 by week +20.A f ina l comment concerns evidence available which conf irms the appropr ia teness ofthe exclusion cr i t e r ion used to est imate the systemat ic r i sk of offe rees 26weeks of data prior to an offe r were excluded) . The proport ion of posi t iveres idua ls for offe rees in the period -100 to -53 was ca lcu la ted , and t h i s wasassumed to be the popula t ion proport ion for the purposes of a binomial t es t onthe observed proport ions in the subperiods -52 to -27 and -26 to O. Ther e su l t an t z - s t a t i s t i c s were 0.57 and 7.56 respec t ive ly , leading to re jec t ion ofthe nul l hypothesis a t the 5 percent conf idence leve l fo r the l a t t e r sub-per iod,but not for the former.5 2 ueeessfuZ OffepeesTable 5 .2 .1 p resen t offe ree re su l t s for 383 successful b ids . Uncanny inves to rfores ight would have to be assumed for us to claim tha t the success of the bidwas determined a t the bid announcement da te . Hence much of the discussion whichfol lows must be hedged careful ly . t i s worth nothing t ha t there are ins tancesof bids by unsuccessful offe rors preceding successful bids . 47The pat tern of the CAR i s s imi la r to tha t of Table 5 .1 .1 . The CAR r i ses 7.2percent during -100 to -10, and by a fu r the r 28.0 percent from -9 to 0 the AR inweek 0 i s +13.5 percen t ) . There are only seven weeks out of ninety weeks inwhich the proport ion of negat ive res idua ls s ign i f i can t ly exceeds ha l f a t the 5percent s ign i f icance l evel over the period -100 to -10, but there are four out often weeks in which the proport ion of posi t ive res iduals s igni f icant ly exceedshal f in the period -9 to 0 , a t the 5 percent s ign i f icance l eve l . The Wilcoxonprobab i l i ty over the per iod -100 to 0 i s again less than .0005. Presumably t h i si s mainly due to the behaviour over the period -9 to OThe CAR r i ses a fu r the r 1.7 percent in the period 1 to +20, 1.5 percent of whichoccurs in week +1. Non-trading cannot be ruled out as an explanation of the week1 AR The Wilcoxon t e s t yie lds a probab i l i ty of 0.596 t ha t the resul ts could

have been observed were the contro l and sample drawn from the same populat ion.The binomial t e s t yie lds no ins tances of dispropor t iona te ly posi t ive res idua ls int h i s per iod, tha t a re s ign i f i can t a t the 5 percent l eve l .5 3 UnsueeessfuZ OffepeesTable 5 .3 .1 repor t s re su l t s for 189 offe rees where the bid was eventua l ly ,desp i te rev is ion and competi t ion in some cases , unsuccessful . 48,49 Over the

~ ~ S i g n i f i c a n c e t e s t s on be ta -sh i f t s were not conducted.47. Eliminating those cases of previous unsuccessful) bids in the pr ior 50 weeksreduces the sample size to 353. Not surpr i s ingly given only 30 el iminat ions)these s ing le bid re su l t s are almost iden t i ca l .48. Exclusion of bids for the same offe ree in the previous 50 weeks in cases ofrev is ion o r competing offe ror involvement reduces sample s ize to 89. Non-tradingand the data co l l ec t ion procedures described in fn 49 below cause availableobservat ions to be l ess than 20, and comment seems inappropria te . See alsofn 53.

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per iod -100 to -30 the CAR decl ines 7.3 percent , and then r i ses 27.4 percent inthe period -29 to O. After a period of excess negat ive returns th i s groupsexperiences considerably improved re turns . The AR in week 0 i s +10.2 percent ,compared to 13.3 percent excess re turn for offerees successful ly acquired. Forunsuccessful offerees the binomial probabi l i ty in week 0 i s in contras t with thatof Table S.2 . l . Approximately 40 percent of the res idua ls in week 0 arenegat ive SO for offerees not acquired, compared to approximately 17 percent forthose acquired. There i s some suggest ion in t h i s comparison of di f f e r en t ia linves tor reac t ion . The Wilcoxon s t a t i s t i c does not lead to the re jec t ion of thenul l hypothesis a t the S percent l evel , in contras t to the binomial t e s t , and tothe r esu l t s for acquired offerees .The CAR r i ses 2.8 percent over the post-announcement period; 2.1 percent of ther i se occurs in week +1. By week S the CAR r i ses S.4 percent and then decl ines2.6 percent by week +20. This r i se and subsequent decl ine could be expla ined bybids being revised upwards, followed by share price decl ines as the unsuccessfuloutcome of the i n i t i a l bid and i t s subsequent revis ions ul t imately becomes knownto the market. Sl This explanat ion cannot be offered with any assurance, as thereare competing informat ional cues flowing to the market in the post-announcementper iod. 52Despi te the b ids ' lack of success ( r eca l l that hindsight i s used in making th i sjudgement) , the CAR does not decl ine in the overa l l post-announcement period.Thus unsuccessful bids must convey, or prompt the conveyance of , information

49. Data co l l ec t ion for th i s group was l imi ted to 26 weeks e i the r side of theannouncement but resu l t s are presented 100 weeks prior to announcement as many ofthese offerees are in other takeover ca tegor ies , I . e . they e i the r make bids orare not acquired in o ther takeover of fe r s . Further , non-t rading ( th i s categorycontains many smaller companies) reduces the number of avai lable observations.so. Corresponding figures for weeks -2 and -1 are 30 percent and 24 percentrespec t ive ly . Both are s ign i f ican t a t a = O.OS.Sl . Revisions occurred in 17 percent of cases where a bid was eventual lysuccessfu l , and in 16 percent of cases where t fa i led . Corresponding f iguresgiven by Walker (1973) are 14 percent and 21 percent . While the data for t h i ss tudy suggest that revis ions do not occur more frequently for unsuccessful bids(and tha t the expecta t ion of a rev is ion i s a f a i r game for a l l of fe r s ) , there i seVidence in Walker 's data that rev is ions a re expected more frequent ly in ex postunsuccessful bids.S2. There are 43 f irms of th i s category where only one unsuccessful bid wasreceived in the period 50 weeks e i the r s ide of the iden t i f ied bid date . However,due to non-trading, the number of available res idua ls for th i s single-bid groupi s on average less than ten . In the period -100 to 40 the CAR decl ined 10.Spercent , and then rose 43.3 percent to be +32.8 percent a t time 0 (18.5 percentof th i s r i s e occurred in the announcement week). By week +20 the CAR was +22.7percent , which i s cons is ten t with a r a t iona l revis ions of expectat ions ofeventual takeover hypothesis . Note however, these resu l t s depend onconsiderable hindsight and fur ther , a fa i r game cannot be const ructed for f irmsso iden t i f ied . I t i s not un t i l the end of the 50 week period that i t i s known acompeting bid was not made, and th i s i den t i f i ca t ion with hindsight vio la tes thef a i r game model.

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which causes permanent rev i s ions to share pr ices . I f we charac te r ise a sha re ' sprice as being se t by the market in accordance with some prior di s t r i bu t ion of afuture successful bid being received, then the rece ipt of an unsuccessful bidcauses a s h i f t in th i s prior dis t r ibut ion. Walker (1973, p.9) repor ted t ha tapproximately 38 percent of companies l i s t ed on the Sydney stock exchange a tsome s tage during 1960-1970 were subject to a bid during tha t eleven yearper iod . Of the 189 unsuccessful bids in Table 5 .3 .1 , 112 are , within a periodof two years , followed by successful acquis i t ions . 53 Based on these r e l a t i vefrequencies plus our knowledge tha t two in th ree of the bids s tudied aresuccessful , there i s a probab i l i ty of .38 t ha t a successful bid wil l be receivedin a one-year per iod condi t ional upon an unsuccessful bid having jus t beenre jec ted ; while the uncondi t ional probab i l i ty of a successful bid being receivedover the same period i s less than a tenth as grea t .The t ime-se r ies plot of average moving beta (Figure 5 .3 .2 ) depicts a pat terns imi la r to tha t of the two previous offeree groups. Average est imated r i skvar ies l i t t l e throughout the inves t iga t ion per iod.Conclu ion fop OffepeeTypical ly shareholders of offe rees , a f t e r experiencing a period of average orbelow average investment performance, enjoy excess posi t ive re turns over the 20weeks up to and including the takeover announcement week. Most of these gainsaccrue in the announcement week. Following the announcement, re tu rns consis ten twith a rapid and unbiased adjustment to new informat ion re leased in the takeoverannouncement, are observed. These re su l t s are consis ten t with the evidenceprovided by Dodd (1976), Bradley (1977), Dodd and Ruback (1977) and Fi r th (1978).Over the inves t iga t ion period there i s l i t t l e change in there la t ive r i sk to offe ree companies. Estimated r i sk var iespercent for a l l of ferees over the pre-announcement period.ex i s t for the acquired and not acquired ca tegor ies .Implication fop Takeovep Hypothe ei he Efficient Mapket Hypothe i

est imated averageby l ess than s ixSimilar patterns

Capita l market eff ic iency with respect to takeover announcements is primari lyconcerned wi th the behaviour of pos t -announcement res iduals. 54 Capi t a l ma rke t53. For these 112 the CAR (ca lcu la ted by se t t ing equal to one to overcomesome data shortage problems) r i ses by 4 .2 , 0 .9 , 4.9 , 8 .6 , and -0.8 percentrespec t ive ly in each of the 10 week per iods fol lowing announcement. For the 77which were not subject to a successful bid corresponding 10 week pos t announcement CARs are -2 .5 , -1 .9 , -9 .0 , 3.3 and 2.7 percent . Over t h i s 50 weekperiod the subsequently acquired group CAR r i ses 17.8 percent , compared to a 7.4percent fa1l for the not acquired group. Clear ly fa i r game impl icat ions arevio la ted here but these r e su l t s shed some l igh t on whether eff ic iency gainsr e su l t from attempted takeovers . In th i s context note t ha t the r i se in the CARfor the 77 f irms in the 10 week pre-announcement period i s 26.6 percent , and, byimplicat ion, some permanent gains are evident .54. Pre-announcement res idua l behaviour i s of some in te re s t in tha t t can beused to determine when informat ion flows to the market. Takeover bids areplanned by management of the offeror over some period pr ior to publ ic re lease .In many cases the of feree ' s management i.s invo 1ved 1n pre -announcemen t

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eff iciency implies tha t market prices ref lect a l l publicly available information,consistent with a theory of market price equilibrium. Provided there i s no expost sample bias induced ei ther by the estimation methods or by the impact ofinformation released subsequently to the bids, the observed post-announcement ARsshould be independently dis t r ibuted around a mean of zero. They were.i i h a ~ e h o Z d e ~ e t u ~ HypothesesThe gains experienced by offerees are maintained, i r respective of bid outcome, inthe post-announcement period. These offeree resul t s are consistent with theInternal Efficiency Hypothesis, where offerees are presumed to own uniqueresources. Information on the avai labi l i ty for sale of these unique resourcescauses offerors to compete for control of the offeree through acquis\ t ion.There is evidence in the pre-announcement ARs and CAR tha t these unique resourcesmay be under-uti l ised or ineff ic ient ly managed assets. 55 Offerees experiencenegative excess returns over periods of approximately 50 weeks in the preannouncement period. 56 Whatever these unique resources may be, the announcementof a takeover offer conveys information concerning the offeree, regardless of theoutcome of the offerThe permanent gains from unsuccessful bids i s an empirical implication of theInternal Efficiency Hypothesis that allows i t to be distinguished from thet radi t ional takeover hypotheses, under which gains are condit ional on asuccessful acquisi t ion. The resul t s give some indicat ion of permanent gains toa l l offeree categories and are thus not consistent with the empiricalimplications of the t radi t ional synergy and monopoly rents arguments.6 RESULTS OFFERORSThis section discusses the resul t s for offerors 57 in the following categories:

1. a l l offerors, i r respective of the outcome of the offer (368 cases);2. offerors whose bids are successful (271 cases);

negotiat ions. f a market is eff ic ient in the strong form, news of a takeoverwould be impounded in to prices prior to i t s public release. That there are someanticipatory price increases prior to the off ic ia l release can be taken as anargument that the market i s able to discover some information prior to i t s publicrelease. However the concern here i s with test ing the MH in i t s semi-strongform.55. A special case of the Internal Efficiency Hypothesis is that takeovers are ameans of disciplining inept management. See Manne (1965) for an exposition ofth is argument.56. For category (a) (572 offerees) the CAR declines from 0.015 to 0.010 over theperiod -90 to -40; for category (b) (383 acquired companies) the CAR declinesfrom 0.020 to 0.012 over the period -89 to -44; for category (c) (189 offereesnot acquired) the CAR declines over the period -100 to -30 by 7.3 percent.57. The post-announcement investigation period for offerors is extended to 100weeks; in other respects the resul t s follow the format described for offerees.

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3. offe rors whose bids are unsuccessful (97 cases) .In addi t ion summary resul ts for various sub-categor ies of the populat ion ofsuccessful offe rors are presented. These sub-categor ies were drawn to offeraddi t iona l evidence on the anomaly repor ted by Dodd (1976).6 1 All f f e ~ o ~ sThe CAR for a l l 368 offe rors accumulated 30.7 percent in the period -100 to O.There are t h i r t een s ign i f i can t (a t x = 0.05) binomial probab i l i t ie s in t h i sper iod, e igh t of which are associated with excess posi t ive res idua ls . TheWilcoxon probab i l i ty i s l ess than 0.001, which ind ica tes tha t t i s extremelyunlikely t ha t the resul ts are due to chance. The pre-announcement offeror CARcont ras t s the of fe ree r esu l t s , as too does the week 0 Average Residual AR) of-0.3 percent . In the announcement week the computed binomial probab i l i ty of0.85, again i s in contras t to the of fe ree r esu l t . There i s no evidence ofposi t ive excess re turns for offe rors on the announcement of takeover of fe r . Inthe 100 week post-announcement period the CAR r i ses fu r the r 2.0 percent , butthe Wilcoxon t e s t does not ind ica te any systemat ic difference between sample andcontro l a t the 5 percent confidence l eve l .The average for th i s group r i s e s over the per iod, by approximately 11percent : from approximately 0.98 a t week -100 to 1.04 per week 0 , and 1.09 a tweek +100.6 2 Sueeessful f f e ~ o ~ sTable 6.2 .1 summarises the re su l t s for 271 offeror f irms which acquire the bid-fo r offeree . 58 The CAR r i s e s over the period -100 to 0 to 28.2 percent . In t h i speriod twelve binomial probabi l i t i es are s ign i f i can t a t x = 0.05; eight of themare associa ted with excess posi t ive res iduals . The Wilcoxon t es t ind ica tes tha tthe pre-announcement CAR behaviour i s highly unl ikely to be observed were thenul l hypothesis t rue .In the period +1 to +100 the CAR decl ines 1 .5 percent with four binomialprobabi l i t i es s igni f icant a t the 5 percent l evel , a l l associa ted with negat iveres iduals . The computed Wilcoxon probab i l i ty i s .084. 59 Despite t h i s re la t ive lylow Wilcoxon probabi l i ty , the ARs in th i s per iod are small . Moreover, 48 areposi t ive and 52 are negat ive .

S ~ e e k 0 i s the date takeover bid was announced. Recal l tha t , for adef in i t i ve t es t of capi ta l market eff ic iency for successful offe rors , re s idua lsshould be cumulated e i t h e r s ide of the date of publ ic knowledge of the o f f e r ' ssuccess . The resul ts derived using the uncondit ional ( I . e . 90 percentacceptance) da te are s imi la r to those reported in Table 6 .2 .1 . Thisuncondi t ional date in many cases occurs a f t e r the ef fec t ive publ ic knowledgedate , as the re lease of percentage acceptance f igures allows the predicti .on ofsuccess pr io r to i t s ul t imate confi rmat ion. The uncondit ional date on average i s15 weeks a f t e r the b id ' s announcement.59. The sample re tu rn less the pai r re tu rn averaged per period was -0.0005. Thisimplies a 5 percent grea te r re turn for pai red f irms over the 100 weeks, comparedto only 1.5 percent using the Rf vers ion of the market model.

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In the period -1 to 1 the CAR declines 1.3 percent. This adjustment isconsistent with the hypothesis that the identif icat ion or confirmation of a firmas an offeror is on average viewed as a disappointment. 60 When i t makes atakeover offer an offeror simultaneously re leases information that i t is not anofferee and that it will not part icipate that week in the excess posi t ive returnsofferees typical ly experience when they receive a takeover offer . Ceter isparibus, survival could be viewed as a disappointment The negative ARs in week

and 1 are consistent with such a "survival disappointment hypothesis".Further, the sl ight though s ta t i s t i ca l ly ins ignif icant dr i f t in the postannouncement CAR can be explained by continued survival and further takeover bidsby surviving offerors . 61Given that offerors on average earn zero or sl ight ly negative abnormal returns inthe resul t s discussed to here, cross-sect ional s ta t i s t ics on offeror re turns inthe post-announcement period are presented in Table 6.2.3.The point a t issue here is an expectation that different returns will accrue todif ferent offerors ref lecting market expectations as to firm specif ic synergist icbenefi ts from the takeover. For example, i t may be expected that firms whichhave a history of acquisi t ions will exhibit different abnormal returns to thosethat make rare acquisi t ions, as expectations di f fer acros s the groups. FromTable 6.2.3, even though announcement week returns are on average negative, 30percent of those offerors have excess posi t ive returns of greater than 1.33percent, while 10 percent have posi t ive excess returns greater than 4.38 percent.Clearly, some takeover announcements are viewed as good news for offerors. Forthe takeover period, i . e . from announcement date to the lIDconditional date , 50percent of offerors have posi t ive abnormal returns.The average r i ses over the Whole period (-100 to +100 by approximately 10percent. The post-announcement r i se of seven percent occurs despi te theacquis i t ion of shares with lower systematic r i sk62 ( the average Ili of offereesat week 0 is approximately 0.87). Galai and Masulis (1976) demonstrate, amongother things, that the systematic r i sk of a f i rm's equity i s a posi t ive functionof the f i rm's leverage, as shown by Hamada (1972), and a negative function of thevalue of the firm, the r iskless rate of in teres t and the variance of the firm.Further, the merger of two firms with less than perfect correlat ion of returnswil l decrease the variance of the new (combined) firm. Hence systematic r isk ofa combined, lower variance firm can exceed that of the merging part ies.

60. Tall share prices for a l l firms included in an index are available , thenthe average residuals of a l l firms over a l l periods covered by the index (derivedfrom a market model regression) must by def ini t ion of the ordinary least squaresregression technique, sum to zero. Given that there are firms in the index withposi t ive excess returns associated with (say) receipt of takeover bids, thenother firms not receiving bids must have, on average, negative residuals.61. For example, Sla t e r Walker Securi t ies (Austr Jlia) Limited, Dunlop AustraliaLimited and Industr ia l Equity Limited made ten, nine and eight successful bidsrespect ively.62. The systematic r i sk estimates of offeror companies may be biased towardszero, due to the non-trading effect being greater for smaller companies. SeeDimson (1979).

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6 3 Unsuccessful OffepopsTable 6 .3 .1 . presents r esu l t s for 97 offerors whose bids are eventual lyre jected . 63 The CAR r i s es 44.0 percent in the period -100 to 0 and then r i s es anaddi t iona l 21.3 percent in the per iod +1 to +100. Were the nul l hypothes is t rue ,the (Wilcoxon t e s t ) probabi l i t ies of observing r esu l t s a t l eas t as st rong asthese are 0.003 and 0.006 respectively. Unsuccessful offerors in the pre- andpost-announcement per iods are thus in fe r red to earn returns that ares ign i f i can t ly grea te r than the cont ro l firm re turns . Yet the week-by-weekBinomial probabi l i t ies behave as expected. In the pre-announcement period fourare s ign i f ican t a t a = 0.05 (one associa ted with excess negative res idua ls andthree with excess posit ive res idua ls ) ; in the post-announcement period s ix ares ign i f ican t ( three associa ted with excess posit ive res iduals and three withexcess negat ive res iduals) . The data f i l e s were checked for the incidence ofpost-bid announcements that could explain the post-bid pattern of re turns .The fol lowing post-bid announcements 64 were made in the period +1 to +100 by the97 unsuccessful of fe rors :

i . 57 f irms made a t l eas t one bonus or r igh t s i ssue . There were (58) separa tebonus issues and 24 r igh t s i ssues a l toge ther ;

ii 15 fi rms were themselves e i the r acquired (12) or received bids 3) forcomplete acquis i t ion ;

iii 2 f irms announced re turns of cap i t a l to shareholders ;iv . 23 fi rms did not make announcements of the above nature . Of the 23, 15

announced dividend increases , two announced dividend reduct ions and s ix madeno change.

The dividend f i l e s reveal that of the 88 f irms for which dividend his to r ie s ex i s t(9 f irms were acquired before the next dividend payment was due):

63. Note t ha t r esu l t s here are for 100 weeks e i the r s ide of the announcement dateof a takeover. This date i s hardly l ikely to be the data of publ ic knowledgetha t Company x i s an unsuccessful of fe ror . Since the unsuccessful labe l i sat tached with hinds ight , these resu l t s are not derived in the context of a fa i rgame. Unsuccessful offers typ ica l ly involve pro t rac ted negot ia t ion per iods , insome cases extending more than two years . Further , the date of public knowledgecannot be pin-pointed with any assurance; severa l percentage acceptance f iguresare re leased in the post-announcement period, and i t i s probable that , l ikesuccess , fa i lu re was predictable prior to the eventual withdrawal date in manycases . Again, although offeree company di r ec tor s ' recommendations toshareholders are c lose ly re la ted to a bid ' s f ina l outcome [Walker (1973) foundthat 92 percent of the takeover bids s tudied succeeded or fa i led in accord withdi r ec tor s ' f inal recommendations], those recommendations do change duringnegot ia t ions (Walker (1973) repor ts 38 ins tances (15 percent of a l l r e jec trecommenda t ions) of di r ec to r s ' recommenda t ions changi ng from re jec t toaccept ) .

64. The term announcement is used somewhat loosely . The data f i l e s containex-dividend and r igh ts dates ra ther than actual announcement dates . However mostof the announcements would have been made in the post-bid period.83



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i . 63 fi rms increased dividends a t least once in the 100 weeks post-bid:ii 13 made no change (5 of these did not pay any dividends):iii 6 increased dividends and subsequently reduced them:iv . 6 reduced dividends.All of the above announcements are captured in the residuals for the post announcement period and are associa ted with posit ive excess re turns for there


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WALTER TAKEOVERSpos i t ive and negat ive res idua ls , a Binomial probabi l i ty of .90 suggests extremeout l i e r s have dominated the r esu l t s .Conclusions for Offeror Categor iesOfferors exper ience pos i t ive excess re turns throughout the inves t iga t ion per iodprior to a takeover announcement. This r esu l t i s cons is ten t with the d i r ec t ionbut not the magnitude of excess returns repor ted by Mandelker (1974), Dodd(1976), El le r t (1976) and Dodd and Ruback (1977). Successfu l offerors exper iencegains of approximately 14 percent per year over the two years pr ior to a bidannouncemen t .66The average r i s es for a l l offeror ca tegor ies over the inves t iga t ion period,desp i te the acquis i t ion of offerees with lower average ~ i Changes in est imatedr i sk are a lso found for unsuccessful offerors . I f the sample est imates areco r rec t , then the repackaging of the f i rm s f inanc ia l charac t e r i s t i c s , typ ica l lyassoc ia ted with a takeover , could explain the increasing systemat ic r i sk .mpZieation f o ~ T a k e o v e ~ ypotheses

i he MHThe post-announcement ana lys is reveals no s ign i f i can t evidence of excess re turnsto offerors fol lowing the i r bids , and i s cons is ten t with Mandelker s r i sk adjusted r esu l t . Dodd s resu l t again cont ras t s the post-announcement per iodr esu l t s of t h i s study. The 136 successful of fe rors s tudied by Dodd have excessnegat ive re turns of seven percent per year in the two years fol lowing the bid,r esu l t s which are anomalous with respect to market ef f ic iency , provided theannouncement predates the negat ive re tu rns . That anomaly i s not present in t h i sstudy.Unsuccessful of fe ror post -bid r esu l t s also contras t the evidence of Dodd.Pos i t ive excess re turns of 10 percent per year are repor ted here; Dodd repor ts nosystemati.c excess re turns from month 2 to +24, a f t e r an abnormal loss of fourpercent in month +1. The unsuccessfu l offeror r esu l t s in th i s study areexpla ined by extrerne out l i e r s . An unambiguous comment on market ef f ic iencycannot be made s ince the r ea l i sa t ion of the unsuccessful outcome of a takeoverbid occurs some t ime a f t e r i t s announcement.i i h a ~ e h o Z d e p RetuPn ypothesesIn an acquis i t ion market where of fe rors ac t ive ly compete for cont ro l of uniqueresources of of ferees , the cons ide ra t ion payable ( inc luding the takeover cos ts )by the offeror wil l equal the compet i t ive equi l ibr ium worth of the asse t sacquired. A takeover i s viewed no d i f fe ren t ly ( for the offeror ) from any otherform of investment in a competi t ive market: the expected re turn i s commensuratewith the leve l of r i sk inherent in the acquis i t ion . Bargain acquis i t ions cannotbe expected in such a market .Suppose of feree firms have unique, under - u t i l i sed resources which are f reed mos te f f i c i en t ly by a takeover . 67 Pr ior to a takeover of fe r , o f fe rees share pr ices6 6 . - r n c c i n t r a s t , Dodd (1976) f inds a negat ive excess re turn of four percentfol lowed by a posit ive excess re turn of nine percent in the two one-year per iodspr ior to announcement.

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wi l l r e f lec t expected re turns from exis t ing management's cont ro l of these as se t sand some pr ior probabi l i ty of higher re turns from a takeover; the takeoverannouncement causes excess pos i t ive re turns to go to offeree companyshareholders , via the increased pr ior probabi l i ty t ha t a takeover wil l eventuate.The successful of fe ror r esu l t s are cons is ten t with the impl icat ions of theIn te rna l Eff ic iency Hypothesis. Typical ly , offerors have pos i t ive excess re turnspr ior to a takeover and look to takeovers as a means of fur ther investment.There i s no evidence of excess re turns in the announcement week or in the pos t -announcement period for successful of fe rors , whereas s ign i f ican t gains are won byofferee shareholders in the announcement week. Assuming investors do notan t i c ipa te a bid, which seems reasonable given the pre-bid behaviour of excessre turns for of ferees , the evidence of normal of feror re turns on announcement andt he rea f t e r suggests tha t offerors face a competit ive market for companyacquis i t ions . 68 In other words the pos tu la ted pos i t ive excess of fe ror returns ofthe t r ad i t iona l takeover hypotheses are not present .Given that bids are not cos t l e s s to of fe rors , 69 why are unsuccessful offerorsrewarded with pos i t ive ( ra ther than negat ive) abnormal returns from the biddate?70 As a corollary, why do successful offerors not earn posi t ive excessre turns from the announcement date to the date success i s known? Two possibleexplanat ions are offered: e i the r the expected loss i s too small to be detected,o r unsuccessful i s a misnomer in the sense t ha t no loss i s expected a t a l l .The median market cap i t a l i sa t ion of successful offerors i s $9.7 mil l ion , which isapproximately f ive t imes the median s ize ($2 mil l ion) of firms they acquire . 7167. Alternat ive avenues poten t ia l ly ex is t for the shareholders of offeree f irmsto free the resources, e.g . the shareholders could hi re new management.Presumably a takeover occurs when the al ternat ives are l ess ef f ic ien t .68. For th i s in terpre ta t ion of the In te rna l Eff ic iency Hypothesis to hold anypos i t ive excess re turns must pre-date the iden t i f ica t ion of a company as anofferor . Some offerors have a his tory of takeover ac t iv i ty . Their presence inthe study weakens the t e s t .69. Smiley (1976) est imated that the cos t of a United Sta tes takeover averages 5percent of the bid price. Smiley 's cost es t imate includes the takeover offerpremium ( L e . the di f fe rence between the bid price and the prevai l ing marketprice of the offeree before the decis ion to acqui re was made by the offeror) , thefixed cos ts of the of fe r (e .g . the cos t of managerial t ime in making the of fe r ,the cost of the publicat ion of the of fe r , lega l costs , accounting and audit ingcos ts and the cos t of damage which might r esu l t to the of fe ror i f the bid fa i ledor was opposed) , and the var iable costs of the of fer (brokerage fees, stampdut ies and share r eg i s te r cos ts ) . The methodology he employed did not allowto ta l cost to be separated in to i t s various components, some of which are notincurred by unsuccessful of fe rors .70. In general the cos ts of an unsuccessful bid are probably sunk. Despite th i s ,an expectat ion of negat ive abnormal re turns can st ll be posi ted as the pos t -announcement period i s the period in which public knowledge of the loss f i r s tbecomes ava i lab le .71. Data for a s imi la r comparison of unsuccessful offerors and offerees do notexis t in the f i l e . While f irm s ize might have some bearing on a bid s outcome,t i s unl ike ly to be the s ign i f ican t reason for success or fa i lu re in takeovers .

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Given these s ize dif ferences , and given t ha t Smiley 's es t imate includes the pricepremium and var iab le costs not incurred by unsuccessful of fe rors , t i s possiblethat post-announcement losses are not evident because they are too small to bedetected.The second poss ib i l i ty i s that unsuccessful offerors on average enjoy gainswhich are suf f ic ien t to compensate them for the cos ts of making the i r of fe r s .About half the unsuccessful bids in Austra l ia are unsuccessful because ofcompeting higher bids .7 2 In many such cases the unsuccessful of fe ror gains byse l l ing i t s holdings in the offeree to the competing offeror a t a price grea te rthan acqu is i t ion cost . While no data ex is t in the f i l e from which I couldest imate the average s i ze of the unsuccessful of fe ror ' s s take and the amount ofthe gain, there i s no doubt that s t ra teg ic p r io r holdings would have exis tedand conferred gains on unsuccessful offerors . In th i s context , the termunsuccessful i s poten t ia l ly a misnomer.VaPious Sub CategoPies of uccessful f f e ~ o ~ sAn objec t ive of t h i s paperannouncement excess negativesuccessful offerors .

i s to of fe r addi t iona l evidence on the pos t returns evidenced in Dodd's (1976) r esu l t s for

This study and Dodd's d i f f e r in some respects . Fi r s t ly , a l l takeoversi r respec t ive of the s ize of the f irm involved are included in th i s s tudy.Secondly, weekly data and Sharpe 's Rf model are used here; changes in r i sk areallowed for by re-est imating Sit each period using the 100 previous weeklyra tes of re turn . Dodd used the cross-sect ional model and monthly data , andallowed for r i sk s h i f t s by est imat ing 8i over a l l ava i lab le pre- and pos t announcement ra tes of re turn. Thirdly , the time per iods s tudied are di f f e r en t ,though there i s some over lap.The objec t ive i s eas i e r to reach i f the populat ion of successful offerors i sdivided as fol lows:

a . 133 offerors making successful bids between January 1966 and 31 December1969;73

72. If we-exclude the 13 (of the 189) unsuccessful bids which occurred in thef i r s t and l a s t 26 week sub-periods of 1966/1972, then in 77 of the remaining 176cases ( i . e . 43.7 percent , which grea t ly exceeds the uncondi t ional expec ta t ion ofa takeover bid) there was a competing successful bid in the period 26 weekse i the r side of the announcement of the (unsuccessful ) bid. Of the 146unsuccessful bids for a t l eas t 50 percent of the of fe ree ' s i ssued cap i ta li den t i f i ed by Walker (1973), 89 of the of fe rees were successfu l ly acquired in ana l t e rna t ive bid. Six ty- f ive of these al ternat ive bids were made within s ixmonths of the unsuccessful bid; the other 24 occurred within the period seven to66 months a f t e r the or ig inal (unsuccessful) bid.73. The populat ion i s sp l i t in to two groups of approximately equal s ize toexamine of fe ror re turns in e a r l i e r and l a t e r per iods . This procedure was a lsoemployed by Dodd. The point a t issue i s whether or not the market reac t ion wascons is ten t during the per iod s tudied or whether there i s evidence of a learningprocess .

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b. 138 of fe rors making successful bids between January 1970 and 31 December1972;

c . 78 offerors making successful of fe r s in the period common to t h i s s tudy andDodd's (1 January 1966 to 31 December 1968);74d. 36 of fe rors which are common to t h i s s tudy and Dodd's (a sub-ca tegory of (c)

above) ;e . 42 of ferors excluded from Dodd's study as monthly data were not ava i lab le ,

being those successfu l offerors in (c) but not in (d) above.Table 6.S summarises the r esu l t s for these sub-ca tegor ies .The post-announcement excess negat ive re turns of successful offerors reported byDodd i s not evident in these sub-ca tegory r esu l t s . The observed re turns pos t announcement for various sub-categories are cons is ten t with the empir ica limpl ica t ions of the EMH and In te rna l Eff ic iency Hypothesis. The anomaly i s notevident in the r esu l t s of the populat ion of successful offerors c lass i f i ed byt ime period, and it i s only par t ly expla ined by Dodd's sampling procedure. Thef irms inc luded in Dodd's study have lower pre- and post -bid excess returns thanthose excluded from Dodd's study. There i s evidence in t h i s comparison t ha t theanomalous post-announcement performance of Dodd's successful offerors i s par t lydue to a se lec t ion bias as soc ia ted with data ava i l ab i l i t y . Excess negat ivere turns of seven percent per year pos t -b id however are still not f u l ly explained.I t thus appears tha t methodological di f fe rences must expla in the markedlyd i f fe ren t r esu l t s .t i s unl ike ly tha t the use of weekly versus monthly data account en t i r e ly forthe dif fe rences . Nor are they l ike ly to be explained by the dif fe ren t methods

es t imat ing (Ji.Differencescontr ibu te .of Sharpe 's

in the empirical models of market equi l ibr ium are l ike ly toDodd employed the cross-sec t iona l model, while an ex post analogueRf model i s used here .

t has been prev ious ly mentioned tha t the i n t e rp re t a t ion of res idua l behaviour asbeing spec if ic to a takeover announcement i s condi t ional on takeover ac t iv i tybeing independent of marke t fac tors , tha t i s Rft and Rmt Simila r ly ,independence i s requi red when es t imat ing YOt and Y1t in the cross - sec t iona lmodel. Dodd (1976, Table A repor ts a dispropor t iona te number of pos i t ive andnegat ive values of YOt and Y1t in the two years before and a f t e r a takeoverof fe r . For YOt there are 7 negat ive and e ight pos i t ive values pr ior to anannouncement, and a l l are pos i t ive a f t e r the announcement, for Ylt 23 values arepos i t ive and two are negat ive prior to the of fe r , and 15 out of 24 are pos i t ivein the period a f t e r the offer . Dodd suggests tha t these can be taken asind ica t ing some l ack of independence, and cont inued (1976, p.24):

While the lack of independence of takeover of fers and the market fac torsl imi t s the extent to which the market r eac t ion ( including i t s ef f ic iency) totakeovers can be assessed, it does not expla in the pers is tent ly-nega t ivepos t -of fe r res idua ls for successful of fe rors . The jo in t impl icat ion of theEMH and the model (employed) still i s tha t the expected pos t-of fe r

74. Dodd s tudied a sample of takeovers announced between January 1960 and31 December 1968.

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dis turbance i s zero The apparent evidence of something unusual about ther e la t ionsh ip between YO Y and t ime measured r e l a t ive to the announcementdate could ind ica te t ha t the two-parameter model i s inappropr ia te in t h i scontex t .

The sens i t iv i ty of Dodd's r esu l t to his choice of model was t es ted by comparingthe CAR est imates der ived from the cross - sec t iona l model with the correspondingest imates derived from the market model. The t e s t was conducted via the AGSM scomputer program API vers ion 1.1, which accesses the N=909 version of Brown'sprice r e l a t ive f i l e . Table 6.6 contains the comparison. I t demonstrates tha tthe est imated CAR i s sens i t ive to model choice,75 Regret tably the API programdoes not accommodate any s igni f icance t e s t s , so the weight to be placed on Dodd'scomputed post-event Wilcoxon probabi l i ty (0.003 for a l l of fe rors ) i s st ll opento quest ion.

7 ON LUSIONSThis s tudy inves t iga ted the share market response to a l l Austra l ian takeoverof fe r s involving a l i s t ed offeree made between 1 January 1966 and 31 December1972. Successful and unsuccessful bids were considered.Two bas ic hypotheses were confirmed. Fi r s t ly , takeover announcements were viewedas a poten t ia l source of valuable informat ion useful in the determinat ion of af i rm's market cap i ta l i sa t ion . The share market reac t ion to information re leasedin takeover bids was observed to be cons is ten t with Fama's semi-strongin te rpre ta t ion of the Eff ic ien t Markets Hypothesis . Secondly, takeovers wereconfirmed to be undertaken in a market for corporate cont ro l in which uniqueresources of offerees are auct ioned among competing offerors .Addi t ional quest ions were addressed. What could expla in the anomaly present inDodd's (1976) Austra l ian takeover study? The most l ike ly explanat ion i s acombination of sample se lec t ion method and the method he chose to i so la te excessre turns . Why does the share price of an offeree subject to an unsuccessful bid,not f a l l back to the pre-bid level? And why does the share price of theunsuccessful offeror not decline, to r e f l e c t the cos t of making an unsuccessfulbid? The answer to the former quest ion l i e s in the revised (upward) pr io rprobabi l i ty of another , th i s t ime successful bid eventuat ing a t some future date;whereas the l a t t e r i s accounted for by the unsuccessful offeror sel l ing i t ss t r a t eg ic holding in the t arget company to the successful competing offeror a t aprice grea te r than cost .

IT:T ha tabnormal re turns a re not so evident in the market model, ra ther than atwo fac tor model, i s cons is ten t with a s ize ef f ec t . See, Banz (1981) andReinganum (1981). When a market model i s used any non-market wide fac tor , suchas a s ize ef f ec t , i s incorporated in to the in te rcept term. So long as th i sef fec t i s s tab le and s ta t ionary through time pr

australian takeovers ajm 1984

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