This paper measures the share price returns to Spanish takeover targets over the period 1990 to 1994. Using several estimation and testing methods, we show that target shareholders gain significant abnormal returns in the announcement period. In the first part of the year before the announcement period, firms that become targets do not show significant abnormal returns, though there is some significant upturn in the two months before the bid.Takeovers; Target firms; Abnormal residuals; Market model; Spain;

Ocaña, Carlos

Peña Sánchez de Rivera, Juan Ignacio

Robles, Dolores

English

Research Papers in Economics

PRELIMINARY EVIDENCE ON TAKEOVER TARGET
RETURNS IN SPAIN: A NOTE
Carlos Oca·a, J. Ignacio Pe·a and Dolores Robles*
INTRODUCTION
Mergers and takeovers are one of the most researched areas in finance, see
Weston et al. (1990). However, most studies concentrate on US markets and,
morerecently,onUKmarkets,seeforinstanceHigsonandElliott(1993).But
there is still little additional evidence coming from small or emerging markets
to complement the results already established for the larger markets. This
paper aims to provide that evidence by analyzing a small market i.e. Spain
(about 1.1% of the total world market in 1994) but one that is reaching
significant magnitudes relative to most European stock markets.
Thisis,totheauthors'knowledge,thefirststudyoftakeoversinSpainbased
onSpanishstockmarket data. Before the StockMarketAct(1989) there were
few recorded takeovers due to a number of factors, among them, the lack of
clear legal regulation on these matters, and the limits on foreign investment
inSpain.Infact,thefirstregisteredtakeovertookplacein1983.Intheperiod
from 1983 to 1985 there were some takeovers, but a significant amount was
only reached after Spain joined the European Community in 1986. In the
period from 1986 to 1989 there were about 30 takeovers but many of them
suffered problems due to the lack of a regulatory authority. Since the Stock
MarketActanincreasingnumberoftakeovershasbeenregistered.
1However,
the number of operations is not comparable with the major markets and
therefore, our sample is relatively small. Thus, the results should be viewed as
only preliminary evidence on the subject.
One particular aspect of takeover activity is analyzed in this paper, the
target share price returns. We find abnormal positive returns for the target
firms. In comparison with the well-known results for the US market reported
by Keown and Pinkerton (1981), abnormal returns in the Spanish market
seem to be bigger. We also found that in the first part of the year before the
announcement period, firms that became targets did not show significant
Journalof BusinessFinance&Accounting, 24(1), January 1997, 0306-686X
ß Blackwell Publishers Ltd. 1997, 108 Cowley Road, Oxford OX4 1JF, UK
and 350 Main Street, Malden, MA 02148, USA. 145
* The authors are from Departamento de Econom|¨a de la Empresa, Universidad Carlos III de
Madrid. They gratefully acknowledge financial support from the Fundacion Banco Bilbao Viz-
caya. They are also grateful to Eudald Canadell and Elias Lopez (CNMV) and to Domingo Gar-
cia-Coto (Bolsa de Madrid) who kindly supplied data and to Gonzalo Rubio for useful
suggestions. They also acknowledge the helpful comments of two anonymous referees. The usual
caveat applies.
Address for correspondence: J. Ignacio Pe·a, Departamento de Econom|¨ad el aE m p r e s a ,
Universidad Carlos III de Madrid, Madrid 126, 28903 Getafe (Madrid), Spain.abnormal returns, though there was some significant upturn in the two
months before the bid. The rest of the paper is organized as follows. The next
sectionpresentsthedataandthethirdsectionthemethodology.Theempirical
results are presented in the fourth section and in the final section we address
some concluding comments.
DATA
A total of 120 successful takeovers (OPA) were recorded in the Madrid Stock
Market (MSM) during the period 1990 to 1994. The sample includes
takeovers of industrial, commercial and financial companies.
2 About 95% of
the takeovers were friendly (i.e. the first bid was not rejected by the target
management). There were 127 bidders
3 (many bidders were foreign
companies whose shares are not traded in Spain) and 120 targets. From that
sample, we selected the firms which met the following requirements:
(i) The stock is continuously listed on the MSM for 244 days before the
takeover's announcement date, and at least 60 days after.
(ii) The announcement and the outcome date must be officially registered
by the Comision Nacional del Mercado de Valores (CNMV), which is
the Spanish version of the US's SEC.
4
(iii) Events which involve the transformation of a public corporation into
a privately-held firm (Going Private) are excluded from the sample.
After applying this criteria, our final sample consisted of 71 targets and 32
bidders. It may be said that the degree of statistical confidence one could
assume by analyzing bidders is somewhat limited and therefore we
concentrate in the analysis of targets in this paper. We analyzed in a previous
unpublishedpaperthe(Spanish)bidder'sreturnsusingthesamemethodology
we report in this paper. The results suggested that for the period before the
announcementdatetheshareholdersofacquiringfirmsneithergainednorlost
statistically significant excess returns. After the merger, we did not find
significantevidenceofdeclineincumulativeaverageexcessreturns.However,
the results should be viewed as merely tentative, because the small sample size
makes drawing firm conclusions difficult.
METHODOLOGY
We follow the standard approach to event studies, developed by Fama et al.
(1969), and Brown and Warner (1980 and 1985). Event studies in finance
measure stock performance after subtracting a benchmark return based on
beta risk. We compute abnormal returns over three periods: (a) the pre-
announcement period, including 244 days pre-announcement to the day
146 OCA¶A, PE¶A AND ROBLES
ß Blackwell Publishers Ltd 1997before official announcement (when the target's stock trade is suspended), (b)
the announcement period, from the day when the target's stock trade is
resumed (day 0) to the day in which the bid goes unconditional, and (c) the
post-takeover period. Periods (b) and (c) must cover at least three months
(60tradingdays).Thereasonisthatthedurationoftheannouncementperiod
varies across takeovers, but in most cases (almost 90%) the outcome date is
one to three months after the bid announcement. For each of the sample
securities, daily rates of return were calculated as:
Rjt  1nPjt  Djt ÿ 1nPjtÿ1 1
where Pjt is the closing price for security j on day t and Djt is the cash dividend
announced formally on day t. Note that t is the day when the shares first trade
`ex dividend'. Abnormal returns were estimated by means of the market
model:
Rjt  j  jRmt  jt 2
where Rmt is the return on IGBM stock index and j, j are parameters to be
estimated and jt are random innovations. The estimated abnormal return is
given by the following equation
ejt  Rjt ÿ aj  bjRmt: 3
Threemethodswereusedtoestimatetheseparameters.First,ordinaryleast
squares (OLS). Second, the method by Cohenet al. (1983) (CHMSW) with a
maximum of five days in price adjustments, which generalizes Scholes and
Williams (1977), to take into account frictions in the trading process
(nonsynchronous trading, etc.). Third, the Market Adjusted Return method
(MAR)whichcanbethoughtofasaparticularcaseofOLS,wherej=0,j=1
forallfirms.Sincej,fordailydata,issmallandtheaveragejoverallfirmsis
1, this approximation usually produces acceptable results.
To eliminate possible event-driven bias in the estimates of j, j the
parameters were estimated using the three methods (OLS, CHMSW, MAR)
over the first 224 trading days of the study, thus excluding the 25 trading days
prior to the announcement date.
5 Then, for these 25 days and for periods (b)
and (c) (usually 90 data points in total), we computed average abnormal
returns (AAR) over all stocks in day t as follows:
AARt 
1
N
X N
i1
eit 4
where N is the number of securities in the sample with a return in t. The
cumulative average abnormal return (CAAR) from event day t1 to t2 is:
CAARt2
t1 
X t2
tt1
AARt: 5
TAKEOVER TARGET RETURNS IN SPAIN 147
ß Blackwell Publishers Ltd 1997If there are no unusual price movements prior to the announcement date, one
wouldexpectbothAARandCAARtofluctuaterandomly.Itshouldbenoted
however, that CAAR follows a random walk and can easily give the
appearance of `significant' positive or negative drift when none is present.
Testing for abnormal returns is performed with four different statistics, two
for AAR and two for CAAR. For the AAR we compute the standard t-ratio
(which is shown as the parallel lines in Figure 1) and T2 which is the signs test
which counts the number of positive and negative abnormal returns and
computestheirsignificanceusingz-statisticswhichisapproximatelynormally
distributed with mean 0 and variance 1 under the null hypothesis.
The statistic is computed using:
^ p 
1
N
X N
i1
1
k
X t2
tt1
Sit 6
where k=t2 ÿ t1 and Sit is an indicator variable, taking value 1 if the AAR is
positive and zero otherwise. The statistic is:
T2 
 ÿ n^ p
n^ p1 ÿ^ p
1
2
7
where  is the number of positive abnormal returns. For the CAAR we
compute T3 which is the ratio of the cumulative average abnormal return to
its estimated standard deviation:
T3 
CAARt2
t1

Pt2
tt1 S2AARt
1
2
8
with autocorrelation adjustments, see Brown and Warner (1985, p. 29), and
T4 which is the nonparametric test proposed by Corrado (1989). This last
procedure involves first transforming each security's time series of abnormal
returns into their respective ranks. Let Kit denote the rank of the abnormal
return eit in security i's time series of abnormal returns:
Kit  rankeit t  t1;...t2 9
where eiteij implies KitKij and (t2ÿt1)Kit1. By construction the average
rankisone-halfplushalfthenumberofobservedreturns,orK*=((t2ÿt1)/2)+
1/2. The rank statistic substitutes (KitÿK*) for the abnormal return eit,
yielding this day j test statistic:
T4 
1
N
X N
i1
Kij ÿ K=SK 10
where the standard deviation S(K) is calculated using the entire (t2ÿt1)
period:
148 OCA¶A, PE¶A AND ROBLES
ß Blackwell Publishers Ltd 1997SK 

1
t2 ÿ t1
X t
tt1
2
1
N
X N
i1
Kit ÿ K
" #2
v u u t : 11
This rank test is correctly specified no matter how skewed the cross-sectional
distribution of abnormal returns.
EMPIRICAL RESULTS
Daily AAR and CAAR for the whole sample and some selected subsamples
were computed using the three methods. To save space we present only the
results of OLS estimation because no significant difference was found in the
results given by the three methodologies. The results for the MAR and
CHMSW methods are available from the authors on request. Test statistics
and graphs are given in Table 1 and Figures 1 and 2. In Figure 1 (AAR with
asymptotic confidence intervals) the most striking feature is the huge positive
residual (about 14%) in day 0 which is somewhat bigger than the values
Table 1
T2-Statistic and Percentage of Positive AAR and Statistics T3 and T4 for
CAAR of Target Companies
Sample %AAR>0 T2-Statistic CAAR(%) T3-Statistic T4-Statistic
(ÿ60,60) 62 *** 41.81 *** ***
(ÿ40,40) 63 *** 40.03 *** ***
(ÿ20,20) 70 *** 35.18 *** ***
(ÿ10,10) 72 *** 22.01 *** ***
(ÿ5,5) 70 *** 16.72 *** ***
(ÿ60,0) 62 *** 38.69 *** ***
(ÿ40,0) 62 *** 35.36 *** ***
(ÿ20,0) 64 *** 32.34 *** ***
(ÿ10,0) 59 ** 19.62 *** ***
(ÿ5,0) 60 ** 15.31 *** ***
(0,60) 72 *** 18.18 ** **
(0,40) 70 *** 18.77 ** **
(0,20) 72 *** 16.84 *** ***
(0,10) 65 *** 16.49 *** ***
(0,5) 64 *** 15.52 *** ***
Notes:
This table shows theT2 (signs test)statistic and the percentage of positive Average Abnormal Re-
siduals (AAR) and the Cumulative Average Abnormal Residuals (CAAR) for targets in Spanish
takeovers. Also this table describes the levels of significance of the T3 (Brown and Warner, 1985)
andT4(Corrado,1989)statistics.TheAARandCAARarecomputedforvarioussubperiods.The
(ÿx, 0) and (0, y) both contain the announcement day reaction. Statistical significance levels are
denoted by ***1% and **5%.
TAKEOVER TARGET RETURNS IN SPAIN 149
ß Blackwell Publishers Ltd 1997reportedfortheUSandUKmarkets(usuallylowerthan10%).Alsothereisa
bunchofpositiveabnormalresiduals,someofthemnearlysignificantinthe20
previous trading days before the announcement date. This might suggest
information leakage before the announcement date. In Figure 2 we may
observe an apparently random behaviour in the first days. However, around
day ÿ30 there seems to be a change and CAAR takes on abnormal
characteristics, rising quickly.
In summary, about 41% positive abnormal return goes to target
shareholders in our sample of successful tender offers. More than one-third of
thisamountisearnedbeforetheannouncementdate.Thus,itmaybesaidthat
targets in our sample earn substantial premiums. This is consistent with the
Figure 1
Average Abnormal Returns of Target Takeovers
Notes:
This figure shows the AverageAbnormal Returns (AAR) for71 target firms tradedin the Spanish
Stock Market before and after the Announcement date (t=0). Abnormal returns were calculated
using the market model: Rjt=j+jRmt+jt where Rjt is the return t of stock's target firm j, Rmt is
the return on IGBM stock index (used as a market return) and j, j are parameters to be esti-
matedand jtarerandom innovations. The estimatedabnormal returnejt is given bythefollowing
equation: ejt=Rjtÿ(aj+bjRmt). The estimated parameters aj, bj are computed using ordinary least
squares (OLS). The AAR are computed over all stocks in day t as follows: AARt=(1/N)
P
eit
where N is the number of securities in the sample with a return in t. The two horizontal lines are
the asymptotic confidence intervals for the null hypotheses that AAR are zero.
150 OCA¶A, PE¶A AND ROBLES
ß Blackwell Publishers Ltd 1997available evidence on the US and UK markets.
6
CONCLUDING REMARKS
The empirical evidence presented in this note suggests that the behaviour of
Figure 2
Cumulative Average Abnormal Returns of Target Takeovers
Notes:
This figure shows the Cumulative Average Abnormal Returns (CAAR) for 71 target firms traded
in the Spanish Stock Market before and after the Announcement date (t=0). Abnormal returns
were calculated using the market model: Rjt=j+jRmt+jt where Rjt is the return t of stock's
target firm j,Rmt is the return on IGBM stock index (used as a market return) and j, j are para-
meters to be estimated and jt are random innovations. The estimated abnormal return ejt is given
by the following equation: ejt=Rjtÿ(aj+bjRmt). The estimated parameters aj, bj are computed
using ordinary least squares (OLS). The AAR are computed over all stocks in day t as follows:
AARt=(1/N)
P
eitwhereNisthenumberofsecuritiesinthesamplewithareturnint.TheCumu-
lative Average Abnormal Returns (CAAR) from event day t1 to t2 is computed as follows:
CAAR
t2
t1 
X t2
tt1
AARt:
TAKEOVER TARGET RETURNS IN SPAIN 151
ß Blackwell Publishers Ltd 1997stock prices during takeovers in a small market (Spain) is quite similar to the
pattern observed in the larger US and UK stock markets. Specifically, we
have found that target shareholders gain significant abnormal returns in the
announcement period. In the first part of the year before the announcement
period, firms that become targets do not show significant abnormal returns,
though there is some significant upturn in the two months before the bid.
While these findings are relevant for the particular market considered, it is
still too early to conclude that small stock markets share the characteristics of
large ones. First, there are few studies of small markets. Second, merger
activityduringtheperiodconsideredresults,atleastinpart,fromaparticular
institutional change, namely the opening of the Spanish economy to the EU's
common market. And third, recent new Spanish legislation on takeovers may
be changing the financial environment in which such activity is taking place.
NOTES
1 From 1990 to 1994 the number of registered takeovers was 120. On average, the total amount
of resources involved was about 2% of total market value each year. The peak was reached in
1991 whenthe resources involved amounted to more than4%of the totalmarket value of that
year.
2 It is interesting to note that, in our sample, typically the bidder's market value was about
200% of the market value of the average firm in the Indice General de la Bolsa de Madrid
(IGBM). This is a value-weighted index that is made up by the 72 main firms listed in the
MSM and is used in this study as a `market factor'. The target's value was about 50% of the
average firm in the IGBM. This result suggests that acquired firms are smaller and is in
agreement with many published studies, see Morck et al. (1987).
3 The number of bidders is greater than the number of targets because in some cases there is a
joint offer from a group of companies. For instance when CAMPSA was the target, the OPA
was jointly managed by five different firms: PETRONOR, REPSOL, CEPSA, ERTOIL and
PETROMED.
4 The takeover procedure is as follows. The bid must be presented in the CNMV which sets the
announcement date and automatically stops the target's stock trade. If the bid is accepted by
all parts (CNMV, bidder and target) target's stock trade is resumed and an outcome date is
fixed. The outcome date is the date on which the offer becomes unconditional.
5 Acheckofthestabilityofj(estimatedbyOLS)betweenthefirst112andlast112tradingdays
of this 224 trading day sample indicated the j's were stable over this period.
6 Inoursample,thebidderisdomesticin32firmsandforeignin39.Wecomputedseparatelythe
AAR and CAAR in both cases. We found slightly higher abnormal returns when the bidder is
domestic but the difference with the abnormal returns in the whole sample is not statistically
significant at usual levels.
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TAKEOVER TARGET RETURNS IN SPAIN 153
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http://e-archivo.uc3m.es/bitstream/10016/7071/1/preliminary_pena_JBFA_1997_ps.pdf

Preliminary Evidence on Takeover Target Returns in Spain: A Note.

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