The Investment Strategy When Having a Breach of Tender Offer: A Case Study of Taiwan's Online Game Companies

Abstract

Having robust investment in the financial market has been the objective of many investors. However, as the financialmarkets in developing countries are not well established, the first-ever settlement default in tender offer happened inTaiwan securities market in August 2016. The Japanese company, Bai Chi Gan Tou, failed to pay for the acquisition.This study uses the contrary investment strategy suggested by Kestner (2003) to analyze 1150 daily trading data ofXPEC Entertainment, a major online game company in Taiwan, during the period 1 January 2012 to 1 September2016. Based on the program trading simulation of 100-day mean reversion trading performance after price diversionand fourteen online game companies as the investment portfolio, the trading profit is $86, showing an increase of10.92%, and exceeds the stock market index by 4.85%.This study further tests the Granger causality, chooses the bellwether stock, X-Legend Entertainment, and uses thetechnical analysis to examine the mean reversion after price diversion based on program trading. The optimalcoefficient from the first stage is extended and used in the second stage to obtain trading profits of $905.59, anincrease of 115.03%. The resulting performance is better than that based on Kestner’s (2003) trading strategy.Therefore, the empirical evidence suggests that latter approach can help make stable profits in the versatile onlinegame stock markets and that the Taiwan online game stock market does not fulfill an efficient market condition. Inconclusion, this study finds evidence supporting our hypothesis that the information of bellwether stock and pricemean reversion characteristic can be used to enhance trading performance in the stock market.