Abnormal returns of target companies' stock prices prior to public takeover announcements

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This study examines the (Cumulative) Average Abnormal Returns ((CAR) ̅ / (AR) ̅) of 171 NASDAQ Composite Index listed takeover targets in the period 2009-2018 to investigate whether abnormal returns are being made prior to the public takeover announcement, which could indicate the presence of insider trading. In order to calculate the (CAR) ̅ and (AR) ̅ in STATA, the market model is used as the normal return model. The results show that the (AR) ̅ and test-statistics are consistently positive from t=-15 till t=-1, in which the (AR) ̅ in the period of four days prior to the official public announcement date are significant at the 0.10 level. The final day prior to the event date is even significant at the 0.005 level. The (CAR) ̅ become positive from t=-41 and indicate that approximately a quarter of the run-up takes place before the event date. Evidence is found that average abnormal returns are being made prior to the public takeover announcement. Unfortunately, the significant (AR) ̅ cannot be attributed to the leakage of or trading on insider information. A second hypothesis investigated whether the method of payment in an acquisition could explain the cumulative abnormal returns. Due to insignificant positive results, hypothesis 2 must be rejected.
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