Selection Bias and Event Studies: The Case of Takeover Likelihood and Takeover Premium

Abstract

In this paper we use Heckman selection models to analyze the relation between the likelihood of the firm becoming a takeover target, the takeover premium, and the use of dual class shares. Ordinary Least Squares regressions suggest that the use of dual class shares is associated with higher takeover premium. However, we also document that the use of dual class shares reduces the likelihood that the firm will be taken over. When we control for the fact that takeovers targets are selected we no longer find a significant relation between the takeover premium and the use of dual class shares. Hence, our results suggest that the takeover premium is indeed influenced by private information about the likelihood of takeover. Our results have implications for the analysis of abnormal returns at corporate events in general since cross-sectional tests of abnormal returns may be influenced by selection bias.