Takeover Prediction Models and Portfolio Strategies: A Multinomial Approach

Abstract

This paper uses a multinomial framework to develop several takeover prediction models. The motivation for this approach lies with Morck, Shleifer and Vishny (1988), who note that separate considerations are appropriate for predicting which firms are subject to hostile (disciplinary) and friendly (synergistic) takeovers. In a typical binomial setting, in which takeover targets are treated as belonging to one homogenous group, differences between hostile and friendly targets are ignored. This may result in biased takeover probabilities and poor predictive performance. The results from this paper show that the multinomial models have higher significance and explanatory power. However, testing the models in an investment portfolio setting, the results suggest that neither approach beats a benchmark control portfolio of firms of a similar size. JEL classification: G34

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