A Comparison of Two Widely Applied Models of Shareholder Returns in the Context of Takeover Offer Gains for Australian Bidders

Abstract

The impact of different modelling and testing procedures is explored on inferences concerning expected acquisition benefits to bidding shareholders. Two widely accepted return models are examined and found to imply different outcomes for Australian bidding shareholders, despite controlling for potential size- and survivor-related biases and also curbing the influence of extreme observations. A comparison of bidder returns with typical reference portfolio values, via the (0, 1) market model, finds significant wealth gains for bidding shareholders. Those gains evaporate when bidder returns are measured against their own performance standards, via the market model. The choice of return model is not the only decision affecting conclusions. Traditional tests are also examined and found to be unreliable. Conflicting conclusions are reached, under the market model, according to the chosen return measure. The inadequacy of traditional tests is demonstrated and the conflict eliminated when more robust bootstrapping tests are applied. Conclusions are more consistent for traditional tests when the (0, 1) market model is used.