Question

In: Finance

Which of the following statements is most correct? Group of answer choices Acquiring firms have the...

Which of the following statements is most correct?

Group of answer choices

Acquiring firms have the largest positive abnormal returns.

Acquiring firms have the largest negative abnormal returns

Target firms have the largest negative abnormal returns.

Target firms receive no real benefit from being taken over.

Solutions

Expert Solution

Target firms have the largest negative abnormal returns.

Reason :

  • A target firm is a company that has been chosen as an attractive merger or acquisition option by a potential acquirer. A takeover attempt can take on many different flavors, depending on the attitude of the target firm toward the acquirer. If management and shareholders are in favor of the transaction, then a friendly and orderly transaction can take place. When there is opposition to the transaction, the target firm may attempt a variety of hostile actions hoping to thwart the takeover attempt.Beyond outright takeover attempts, as has been the historical norm, shareholder activism is a modern twist on the definition of 'target firm.' For instance, as the importance of gender equality, environmental concerns, and cybersecurity issues grow in popularity — it's common for the media, analysts and shareholders to 'target' a firm for a variety of shareholder/stakeholder activism efforts.
  • The acquiring company is the buyer, the company that buys another company
  • An abnormal return describes the unusual profits generated by given securities or portfolios over a specified period.

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