Abstract
The corporate control hypothesis predicts that an efficacious takeover market will facilitate the efficient utilization of societal resources and result in management decisions that serve to maximize shareholder wealth. The mechanism by which these things are accomplished is the corporate takeover. This implies that, for those firms that are the targets of corporate takeovers, one will observe, on the date on which the takeover bid is announced, a sharp increase in the price of the firms' common shares. The hypothesis further implies that, relative to their previous performance, the financial characteristics of the takeover targets will differ substantively as a result of changes in the management decision-making process. This study combines residual analysis and the analysis of published financial data: changes in the expectations of market participants regarding the future performance of the target firms are measured by the magnitude of the residual or "excess" returns on the targets' common shares, and the changes in the financial attributes of the target firms are reflected in intertemporal variations in financial ratios constructed from their financial statements. The empirical results obtained indicate that: (1) the short-term market reaction to the announcement of a takeover bid is generally positive, as reflected in the appearance of increased returns on the targets' common shares; but that, (2) over the longer-term, changes in the financial characteristics of the target firms are statistically indistinguishable from changes in the financial characteristics of similar, non-target firms. The latter result is not consistent with the predictions of the corporate control hypothesis. Consequently, two other possible explanations of the excess returns were investigated: (1) that they constitute transfers of wealth from the debtholders of the target firms; and (2) that they reflect information effects related to the type of the takeover bid announced. There is some evidence that both factors are related to the magnitude of the excess returns observed.
Eyssell, Thomas Henry (1986). The effects of hostile takeover bids on their targets : an empirical test of the corporate control hypothesis. Texas A&M University. Texas A&M University. Libraries. Available electronically from
https : / /hdl .handle .net /1969 .1 /DISSERTATIONS -16414.