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RFS Advance Access originally published online on April 2, 2008
Review of Financial Studies 2009 22(4):1409-1445; doi:10.1093/rfs/hhn032
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© The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org

Takeovers and the Cross-Section of Returns

K. J. Martijn Cremers
Yale School of Management

Vinay B. Nair
New York University

Kose John
Stern School of Business, New York University

Send correspondence to K. J. Martijn Cremers, Yale School of Management, 135 Prospect Street, New Haven, CT 06511; telephone: +1-203-436-0649; email: martijn.cremers{at}yale.edu


  Abstract

This paper considers the impact of the takeover likelihood on firm valuation. If firms are more likely to acquire when there is more free cash or lower required rates of return, the targets become more sensitive to shocks to cash flows or the price of risk. Ceteris paribus, firms exposed to takeovers have different rates of return than protected firms. Using takeover likelihood estimates, we create a "takeover factor," buying (selling) firms with a high (low) takeover likelihood, which generates "abnormal" returns. Several tests confirm that the takeover factor helps explaining cross-sectional differences in equity returns and is related to takeover activity.

The authors thank two anonymous referees and Michael Weisbach (the editor), Andy Abel, William T. Allen, John Core, John Campbell, Robert Daines, Joao Gomes, Paul Gompers, Annette Vissing-Jorgensen, Lubomir Litov, Anthony Lynch, Andrew Metrick, Stew Myers, Stavros Panageas, Michael Roberts, Antoinette Schoar, Matthew Spiegel, Jessica Wachter, Jeff Wurgler, and Moto Yogo, as well as participants at the Wharton, MIT, NBER Asset Pricing Meetings, Stockholm School of Economics, INSEAD, University of Amsterdam, Said Business School at Oxford, EFMA, AFA, and the 2006 UNC-Duke Conference for comments and/or helpful discussions. Dasol Kim and Kate Davis provided excellent research assistance.


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