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The Industry Effects Regarding the Probability of Takeovers

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  • Akhigbe, Aigbe
  • Madura, Jeff

Abstract

This study attempts to determine whether an acquisition announcement signals potential gains to the corresponding industry rivals of the target, and whether these gains can be explained by industry-specific and rival firm-specific factors that reflect the likelihood of a takeover. The research finds that the valuation effects of the target, combined acquirer and target, and industry rivals of the target are positive and significant. The mean variant effects per corresponding industry are significantly related to industry-specific characteristics that reflect the probability of a takeover. Specifically, industries characterized as having a higher level of free cash flow, a higher level of tangible assets, and a smaller market value experience a more favorable revaluation. A supplemental analysis of the individual rival firms is also conducted, since the variation in the valuation effects between rival firms within each of the industries is distinctly different from the variation of mean industry effect across industries. The analysis of the individual rivals finds that the same rival-specific variables are significant and in the same direction as the analysis of the industry-specific variables. In addition, the valuation effects of individual rivals are also inversely related to their previous performance. Overall, the results suggest that industry-specific and rival firm-specific characteristics that reflect a higher probability of a takeover are important in explaining acquisition gains and motivation. Copyright 1999 by MIT Press.

Suggested Citation

  • Akhigbe, Aigbe & Madura, Jeff, 1999. "The Industry Effects Regarding the Probability of Takeovers," The Financial Review, Eastern Finance Association, vol. 34(3), pages 1-17, August.
    • Handle: RePEc:bla:finrev:v:34:y:1999:i:3:p:1-17
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    Cited by:

    1. Navío-Marco, Julio & Serrano Calle, Silvia & Solórzano-García, Marta, 2017. "Analysis of glamorous acquisitions in the telecommunications sector: Overvaluation or success?," 28th European Regional ITS Conference, Passau 2017 169487, International Telecommunications Society (ITS).
    2. Mataigne, Virginie & Manigart, Sophie & Luypaert, Mathieu, 2021. "Acquisitions: A curse or blessing for direct competitors? The impact of target ownership structure," Journal of Corporate Finance, Elsevier, vol. 69(C).
    3. Navio-Marco, J & Solorzano-Garcia, M & Urueña, A., 2015. "Language As Key Factor Of Long-Term Value Creation In Mergers And Acquisitions In The Telecommunications Sector," 26th European Regional ITS Conference, Madrid 2015 127170, International Telecommunications Society (ITS).
    4. Otchere, Isaac & Ip, Edwina, 2006. "Intra-industry effects of completed and cancelled cross border acquisitions in Australia: A test of the acquisition probability hypothesis," Pacific-Basin Finance Journal, Elsevier, vol. 14(2), pages 209-230, April.
    5. Jeff Madura & Thanh Ngo, 2012. "Re-examination of industry effects due to withdrawn mergers," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 36(3), pages 613-633, July.
    6. Li, Donghui & Chen, Zhian & An, Zhe & Murong, Michael, 2017. "Do financial analysts play a role in shaping the rival response of target firms? International evidence," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 84-103.
    7. Ulrich Hege, 2010. "Acquisition Values and Optimal Financial (In)Flexibility," Review of Financial Studies, Society for Financial Studies, vol. 23(7), pages 2865-2899, July.
    8. Navío-Marco, Julio & Solórzano-García, Marta & Matilla-García, Mariano & Urueña, Alberto, 2016. "Language as a key factor of long-term value creation in mergers and acquisitions in the telecommunications sector," Telecommunications Policy, Elsevier, vol. 40(10), pages 1052-1063.
    9. Srinivasan Ragothaman & Bijayananda Naik & Kumoli Ramakrishnan, 2003. "Predicting Corporate Acquisitions: An Application of Uncertain Reasoning Using Rule Induction," Information Systems Frontiers, Springer, vol. 5(4), pages 401-412, December.
    10. M. Mark Walker & Chi-Sheng Hsu, 2007. "Strategic objectives, industry structure and the long-term stock price performance of acquiring and rival firms," Applied Financial Economics, Taylor & Francis Journals, vol. 17(15), pages 1233-1244.
    11. Otchere, Isaac, 2005. "Do privatized banks in middle- and low-income countries perform better than rival banks? An intra-industry analysis of bank privatization," Journal of Banking & Finance, Elsevier, vol. 29(8-9), pages 2067-2093, August.

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