Predictability of Financial Ratios in Takeovers on Finnish Stock Market

Abstract

Takeover prediction never stopped to attract attention of researchers and investors in the capital market. The reason is in the takeover premiums that average around 30%. This paper investigates five takeover hypotheses which were frequently suggested in the academic and popular financial literature, on the types of firms that are likely to become acquisition targets. The study replicates Palepu (1986), who employs financial ratios in logit models to investigate the usefulness of six acquisition hypotheses in predicting takeover targets. The data of Helsinki Stock Market from 1997 to 2000 is used as a test case, a group of 10 targets and 34 non- targets were identified as a sample for logit model estimation. The results show that the logit model in this paper can not provide a statistically significant explanation of a firm’s acquisition probabilities. The findings do not consist with five takeover hypotheses. The weak results mainly due to lack of data, small samples used in the paper or it might be associated to measurement error, specification bias and other technical reasons.

This study can be used by different groups that are likely to be affected by takeovers. For example, investors or shareholders may be able to earn large gains if they have some prior knowledge of takeover; corporation management could identify potential acquisitions to plan their growth strategies or carry on some preparation against future hostile takeovers.