Company Takeovers and Equity Returns: The Target Size Effect

Abstract

This paper examines the relationship between the size of a target and the market's reaction to the announcement of a takeover offer. Using the constrained (0,1) market model to estimate abnormal returns, results from a sample of takeovers from 1984-88 indicate size effects for takeover targets at announcement date. While this outcome is consistent with both infor Mation asymmetry and liquidity explanations for the size effect, examination of the extent to which our whole-sample result is robust to a classification of the sample into sub-samples on the basis of outcome shows that the target size premium is explained by firms which are subject to a subsequent takeover. Sensitivity tests are conducted to establish the robustness of this result. We conclude that it is unlikely that a statistically significant target size effect is present in takeovers although the results are ambiguous.