Abnormal Returns before Public Offers of Acquisition: Evidence from Europe

Objectives: The announcement of Public Offerings of Acquisition (POA) influences the stock price of the targeted firms, providing an opportunity for investors with inside information to obtain significant capital gains, buying before the announcement date and selling after. We study the presence of positive abnormal returns before the announcement date, in the firms targeted by POAs, in the Euronext markets (France, Holland, Belgium and Portugal) in the period 2001 to 2007. We investigate if the pre-announcement run-up of prices can be explained by : (i) rumors in the media: (ii) the percentage of capital previously owned by the offering firm; (iii) friendly/hostile offers; (iv) price book value; (v) earnings per share; (vi)  price recommendations by analysts; and (vii) insider trading.

Data/Methods: We apply event study methodologies, and examine cumulative abnormal returns (CAAR) in an event window of 60 days before the event date, which is the announcement of a POA. The event date is adjusted for the previous release of news about the OPA in the media. We compute a run-up index, which is the ratio of the CAAR in days [-60; -1] relative to the CAAR in days [-60; +1]. We study the explanatory power of a set of dummy variable, for the dependent variable “run-up”, estimating different specifications and using OLS and Stepwise regressions.

Results: We find that there are abnormal positive returns before the announcement date, as measured by the run-up index, although smaller then found in previous studies. A significant part of the run-up is explained by: (i) market anticipation triggered by legitimate sources of information, namely, rumors in the media about the possibility of a POA on the firm; (ii) by the percentage of capital owned in the target firm, by the offering firm. We not find direct evidence of insider trading causing the run-up, but this may be due to incomplete information.