Abstract
This paper considers the impact of the likelihood on firm valuation. If firms are more likely to acquire when there is more free cash or lower required rates of return, the targets become more sensitive to shocks to cash flows or the price of risk. Ceteris paribus, firms exposed to takeovers have different rates of return than protected firms. Using likelihood estimates, we create a takeover factor, buying (selling) firms with a high (low) likelihood, which generates abnormal returns. Several tests confirm that the factor helps explaining cross-sectional differences in equity returns and is related to activity. The Author 2008. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please email: journals.permissions@oxfordjournals.org, Oxford University Press.
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