The Industry Effects Regarding the Probability of Takeovers

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Abstract
This study attempts to determine whether an acquisition announcement signals potential gains to the corresponding industry rivals of the target, and whether these gains can be explained by industry‐specific and rival firm‐specific factors that reflect the likelihood of a takeover.The research finds that the valuation effects of the target, combined acquirer and target, and industry rivals of the target are positive and significant. The mean valuation effects per corresponding industry are significantly related to industry‐specific characteristics that reflect the probability of a takeover. Specifically, industries characterized as having a higher level of free cash flow, a higher level of tangible assets, and a smaller market value experience a more favorable revaluation.A supplemental analysis of the individual rival firms is also conducted, since the variation in the valuation effects between rival firms within each of the industries is distinctly different from the variation of mean industry effect across industries. The analysis of the individual rivals finds that the same rival‐specific variables are significant and in the same direction as the analysis of the industry‐specific variables. In addition, the valuation effects of individual rivals are also inversely related to their previous performance. Overall, the results suggest that industry‐specific and rival firm‐specific characteristics that reflect a higher probability of a takeover are important in explaining acquisition gains and motivation.

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