Buyouts – a study of pre-announcement returns

Abstract

Problem: When firms face a possible acquisition and buyout from the stock market, the shareholders can earn huge returns since the acquirer offers a premium above market price. The implications of the efficient market hypothesis are that share prices are not predictable and investors cannot earn abnormal returns without any new public information. Aim and purpose: The purpose of this paper is to examine whether it occurs abnormal return on the target firm’s share before an announcement of a buyout is made. We aim to study shares listed on the Swedish stock market that have been bought out from the market and are not listed anymore. Method: The paper will be conducted with an event study. The event study methodology is often used to test the efficiency of a market by determine if there are abnormal returns for a selected security at a specific event Result and conclusions: Using hypothesis testing, we have concluded that it is statistically significant that cumulative abnormal return did occur during the 14 days preceding an announcement. The most likely explanation for this is thought to be rumors and inside information.