Question
When it is announced that a company is the target of a takeover offer, its stock price typically goes up. However, the increase in stock
When it is announced that a company is the target of a takeover offer, its stock price typically goes up. However, the increase in stock price is usually smaller than the take-over premium (i.e. the difference between the offered price and the pre-announcement stock price). If the take-over succeeds, the stock price will further increase. This situation suggests that investors can benefit from take-over announcements by buying stocks in target companies right after the announcement has been made.
Describe how both informed and uninformed investors would try to benefit from this situation. Also explain what the implications are for the average returns of both investor groups.
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