On the Use of Implied Stock Volatilities in the Prediction of Successful Corporate Takeovers
AbstractThis paper develops and tests the notion that it is possible to use the post-announcement prices from the stock and option markets to infer both the probability of success and timing of an attempted takeover. Using a sample of 65 cash tender offers from the period January 1980 to July 1989, we demonstrate that the sequence of implied stock volatilities generated from the options of the target firm expiring both before and after the resolution date of the proposed deal exhibit a pattern strongly consistent with the hypothesis that prices are set in anticipation of the eventual outcome. We conclude that traders in the market for takeover candidates behave in a rational manner, although with less-than-perfect foresight.
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Bibliographic InfoPaper provided by Wharton School Rodney L. White Center for Financial Research in its series Rodney L. White Center for Financial Research Working Papers with number 23-94.
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- Hutson, Elaine, 2000. "Takeover targets and the probability of bid success: Evidence from the Australian market," International Review of Financial Analysis, Elsevier, vol. 9(1), pages 45-65, February.
- Hutson, Elaine & Kearney, Colm, 2001. "Volatility in stocks subject to takeover bids: Australian evidence using daily data," Journal of Empirical Finance, Elsevier, vol. 8(3), pages 273-296, July.
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