Takeover Vulnerability and the Behavior of Short-Term Stock Returns

Posted: 14 Apr 2013

See all articles by Joon Chae

Joon Chae

Seoul National University

Dong Wook Lee

Korea University

Shu-Feng Wang

National Central University, Department of Finance; Ajou University - Department of Business Administration

Date Written: March 29, 2013

Abstract

This paper proposes and tests the hypothesis that takeover vulnerability contributes to short-term price reversal by motivating investors to trade speculatively and also by making investors demand immediacy in their trades. That is, takeover vulnerability is hypothesized to amplify two channels of short-term price reversal, namely, overreaction and price concession. Using several different measures of takeover vulnerability, we find that takeover vulnerability is positively related to price reversal at daily frequencies. We also find that their positive relation is more pronounced when the stock is illiquid or when it is costly to arbitrage, a finding that is consistent with the notion that the observed price reversal is driven by the earlier price concession or overreaction. While unable to determine the exact relative importance between the two channels, we conduct further analysis showing that each channel plays an independent role. Finally, we find no relation between takeover vulnerability and price reversal at the portfolio level, which means that the price reversal observed in individual stock returns is driven by a firm-specific component.

Keywords: Takeover vulnerability, Short-term price reversal, Overreaction, Price concession

JEL Classification: G10, G14, G30, G34

Suggested Citation

Chae, Joon and Lee, Dong Wook and Wang, Shu-Feng, Takeover Vulnerability and the Behavior of Short-Term Stock Returns (March 29, 2013). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2250569

Joon Chae

Seoul National University ( email )

Seoul, 151-742
Korea, Republic of (South Korea)
82-2-880-6929 (Phone)
82-2-882-0547 (Fax)

Dong Wook Lee (Contact Author)

Korea University ( email )

523 Hyundai Motor Hall
Korea University Business School
Seoul, 02841
Korea, Republic of (South Korea)
+82.2.3290.2820 (Phone)
+82.2.3290.1307 (Fax)

Shu-Feng Wang

National Central University, Department of Finance ( email )

No. 300, Jhongda Rd, Jhogli City, Taoyuan, Taiwan,
Jhongli, TY 32001
Taiwan
886-3-4227151 # 66261 (Phone)

Ajou University - Department of Business Administration ( email )

206 Worldcup-ro
Yeongtong-gu
Suwon, 443-749
Korea, Republic of (South Korea)

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