This paper examines the methodological issues of using accounting ratios to predict takeover targets. Certain improvements are suggested, notably the use of industry-relative ratios and the deterimination of an ex ante cut off point which maximizes returns. The empirical study suggests that industry-relative ratios are not an improvement upon industry-specific models and that, although the models perform better than chance, they do not perform sufficiently well as to earn excess returns. Unfortunately, the results are not sufficiently sensitive as to be significantly affected by the choice of cut off point.
Review of Quantitative Finance and Accounting – Springer Journals
Published: Oct 15, 2004
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