The microstructure of Australian takeover announcements

Using several microstructure variables, this study provides an intra-day examination of aggressive trading around Australian takeover announcements. We conduct this analysis for both target and bidding firms. We examine aggressive trading (i.e. by those who initiate the trade) using the abnormal behaviour of returns, trading volume, volatility and time-weighted spreads and depth. In addition, we develop a novel profit/loss measure (PLM) based on trade initiation and provide new evidence using the recently developed volume-synchronised probability of informed trading (VPIN) metric. In a univariate setting, these measures provide evidence of increased aggressive trading in Australian target firms. Further, after controlling for several microstructure variables, multivariate analysis reveals the presence of abnormally elevated time-weighted spreads prior to the announcement date for target firms. We show that VPIN is significantly elevated for target firms, especially in the four days prior to the takeover announcement.