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Please use this identifier to cite or link to this item:
http://hdl.handle.net/2451/26410
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| Title: | Takeovers, Governance and The Cross-Section of Returns |
| Authors: | CREMERS, K. J. MARTIJN
NAIR, VINAY B.
JOHN, KOSE |
| Issue Date: | 2-Mar-2005 |
| Series/Report no.: | FIN-05-009 |
| Abstract: | This paper considers the impact of the takeover channel on firm
valuation. We use the idea that takeover activity responds to investor
expectations of future rate of return and hence to state variable(s)
related to the time variation in risk premia. Thus firms with higher
exposure to takeovers, due to higher expectations of receiving a
takeover premium, have a higher exposure to the state variable that
dictates time variation in risk premia. Consequently, the difference in
the returns between firms that differ in their takeover vulnerabilities
can be used to used to proxy these state variables. To do so, we create
a takeover-spread portfolio that buys firms with low
cash-adjusted-leverage (cheaper targets) and shorts firms with high
cash-adjusted-leverage and show that such a portfolio generates
annualized abnormal returns of up to 11.20% between 1980 and 2003. Also,
abnormal returns associated with governance-spread portfolios (Gompers,
Ishii and Metrick, 2003 and Cremers and Nair, 2004) decrease
significantly once the asset pricing model includes this
’cash-adjusted-leverage’ factor. Finally, we propose a new
‘takeover’ factor to proxy for the risk due to changes in
these risk-premia related state variables, which is shown to be
important in explaining cross-sectional differences in equity returns.
The paper shows why investors require a higher rate of return on firms
exposed to takeovers and yet value them higher than firms protected from takeovers. |
| URI: | http://hdl.handle.net/2451/26410 |
| Appears in Collections: | Finance Working Papers
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