Conditional Returns to Shareholders of Bidding Firms: An Australian Study

Abstract

This study examines the importance of the self-selection problem when evaluating returns to bidder firms around announcement events. Takeover announcements are not random because managers decide rationally whether to bid or not, this indicates announcements are timed; consequently, in the presence of sample selection problem, standard OLS estimates are biased. Using a conditional model the results indicate that after controlling for the self-selection bias effect, shareholders of bidder firms make normal returns. Results are robust and consistent with conventional economic theory. In sum failing to account for sample selection bias may lead to erroneous conclusions about a bidder’s true economic wealth effects around an announcement event.