Toeholds and the Bidder Shareholder Wealth Effects of Takeover Announcements

Abstract

This paper provides new evidence regarding the bidder shareholder wealth effects of takeover announcements by utilizing a robust method not previously employed in the area, namely Barber and Lyon's (1997) control firm approach. Thereafter, the study offers the first Australian evidence of the impact of toeholds on bidder abnormal returns. Finally, it considers whether this effect differs between single-bidder and multiple-bidder takeover contests. Using a dataset of 122 takeover announcements made by Australian listed companies between 1997 and 2004 inclusive, no significant bidder abnormal returns are documented in response to takeover announcements on average. However, examination of the cross-sectional variation in these wealth effects reveals a significantly positive association between the presence of toeholds/toehold size and bidder abnormal returns. Furthermore, immediate market reaction is consistent with Bukart's (1995) and Singh's (1998) Overbidding Hypothesis, which predicts a less pronounced toehold impact for rivaled bidders. Nonetheless, market expectation of overbidding for toehold bidders proves incorrect in the long-run post-announcement period, where the positive impact of toeholds does not differ between different models of takeover contests.