What determines takeover likelihood? A review and propositions for future research

Abstract

Prior takeover prediction research has advanced eight hypotheses to explain why specific firms are targeted through takeovers (Palepu, 1986; Powell, 2001; Tunyi, 2021a). However, takeover targets remain difficult to empirically predict ex-ante, perhaps because these established sets of hypotheses do not substantially explain takeover likelihood (Danbolt, Siganos, & Tunyi, 2016). This paper reviews the literature on takeover prediction, particularly focusing on theory, propositions and testable hypotheses on the factors that drive firms’ takeover likelihood. Drawing from prior research outside this literature, the paper then develops conceptual arguments underlying six new predictors of firms’ takeover likelihood including; information asymmetry, mergers and acquisitions (M&A) rumours, financial distress, payroll synergies, share repurchases and industry competition. Specifically, we predict that a firm’s likelihood of receiving future takeover bids increases with merger rumours and industry competition and declines with information asymmetry and share repurchases. Additionally, takeover likelihood plausibly has an inverse U-shaped relationship with payroll excesses and the level of financial distress.