The Impact of Target Financial Trends on Bidder Announcement Return: Empirical Evidence from the Norwegian M&A Market

Abstract

We study the relationship between bidder announcement return and prior target financial development in the Norwegian takeover market. Based on a sample of 120 acquisitions of primarily private targets, we find that changes in financial ratios relative to the sample standard deviation provide more explanatory power than absolute ratio levels. Our results indicate that target size and trends in asset turnover have a statistically significant influence on the announcement return. On the one hand, the market is positively related to target size, yet it has a negative development in asset turnover on the other hand. We further find that the impact of the dynamic accounting characteristics is time-dependent, meaning that the importance of these variables changes over time. The trend measure of leverage is significant in the period between 2006-2016, indicating that this variable contributes to explain the announcement return in this particular period. The trend measures of liquidity and net profit margin are, however, not statistically significant in any of the short-term windows. Reviewing our results, we summarize that the shareholders of the bidding firm are most optimistic about the announcement when the target firm is large in size and with a decreasing asset turnover. In addition, increasing leverage levels seemed to be important in earlier years, whereas trends in liquidity and net profit margin seem to be irrelevant when explaining movements in announcement return regardless of the time frame.