A possible reason for little effect on the wealth of acquiring-company shareholders in reaction to a takeover announcement even though a takeover might be profitable is:
A)the expected gains from the takeover may have already been reflected in the company's share price.
B)the market is inefficient in impounding such information.
C)that returns to shareholders may have changed over time.
D)the takeover is not profitable.

Question

Quizplus · Accepted Answer

When news of a potential takeover becomes public, the market reacts by adjusting the stock price of the target company to reflect the expected gains from the takeover. As a result, the increased value of the target company's shares may already be reflected in the acquiring company's share price, leading to little effect on acquiring-company shareholders. This is known as the "announcement effect." While inefficient markets (B) and changes in returns over time (C) can affect shareholder reactions to takeover announcements, the most likely explanation for little effect on acquiring-company shareholders is that the gains from the takeover were already priced in. Option D can be ruled out as the question assumes that the takeover is profitable.

A Possible Reason for Little Effect on the Wealth of Acquiring-Company