Australian takeovers: Capital market efficiency and shareholder risk and return

This paper explains the share market's response to Australian takeover bids. Both successful and unsuccessful bids are considered. Two issues are addressed. Firstly, takeovers are viewed in terms of corporate investment decisions; the profitability of these decisions to the offeree and to the offeror are investigated. Secondly, takeover bids are seen as a valuable source of information relevant to the determination of a firm's share market capitalisation. The adjustment of share prices to this information source is studied within the context of the Efficient Markets Hypothesis. The results indicate that offeree shareholder returns are normal or below normal prior to a bid; whereas offerors exhibit above average returns. When a bid is made, offeree shareholders typically receive significant positive excess returns; whereas offeror shareholders gain no additional benefit. Australian share markets are confirmed to be semi-strong efficient in the Fama sense, namely that information made public during takeover negotiations is rapidly and without bias incorporated into share prices.