Numerous studies estimate the effects of takeovers on stock prices of bidder and target firms around the time of announcement of takeover attempts. Such event studies use estimates of the abnormal stock price changes around the offer announcement date as a measure of the economic effects of the takeover. Abnormal returns are measured by the difference between actual and expected stock returns. The expected stock return is measured conditional on the realized return on a market index to take account of the influence of market wide events on the returns of individual securities.
Academics and other commentators have proposed two different types of takeovers: The first is what we call friendly takeover, in which the tender offer of the bidder is unopposed by target management. The second is hostile takeover, in which the tender offer of the bidder is opposed by the target management. Several researchers have focused their study in comparing the effect of two types of takeovers on stock prices of both bidder and target firms.
Kummer and Hoffmeister (1978) examine the abnormal returns associated with tender offers that are opposed and unopposed by target management, i.e. friendly and hostile takeover offers. The average abnormal return of target shareholders in the announcement month is 16.45% (t = 15.16) for the 44 successful friendly takeovers, versus 19.80% (t = 13.62) for 21 targets in which managers opposed the offer. Thus, managerial resistance is associated with higher premiums for offers that proved successful. However, fifteen of the 21 targets in hostile takeovers were not acquired within ten months, and the shareholders of these firms incurred abnormal losses of 11.7% in the ten months following the initial offer. This pattern of abnormal returns is consistent with the results of Bradley, Desai and Kim (1983): Stock prices rise at the announcement of the initial bid and then decline if future takeover bids do not materialize. The Kummer and Hoffmeister...