Tobins strongQstrong and the Gains from Takeovers.pdfVIP

THE JOURNAL OF FINANCE • VOL . LXVI, NO . 1 • MARCH 199 1 Tobins Q and the Gains from Takeovers HENRI SERVAES* ABSTRACT This paper analyzes the relation between takeover gains and the q ratios of target s and bidders for a sample of 704 mergers and tender offers over the period 1972-1987 . Target, bidder, and total return s are larger when targets have low q ratios and bidders have high q ratios . The relation is strengthened after controlling for the characteristics of the offer and the contest. This evidence confirms the results of the work by Lang, Stulz, and Walkling and shows that their findings also hold for mergers and after controlling for other determinants of takeover gains . IN A RECENT PAPER, Lang, Stulz, and Walkling (LSW) (1989) document that the abnormal returns in tender offers are related to the Tobins q ratios of the targets and the bidders. In particular, they find that target, bidder, and total returns are higher when takeover targets have high q ratios and bidders have low q ratios where one is used as a cutoff point to separate high q firms from low q firms. In fact, bidders with high q ratios have significant positive abnormal returns when they engage in a takeover, while bidders with low q ratios have significant negative abnormal returns . The best takeovers, in terms of value creation, are those where a high q firm takes over a low q firm. The opposite scenario holds for the worst case takeovers—low q firms taking over high q firms. If q is interpreted as a measure of managerial performance, these findings imply t