Investor Reaction to Mandatory Offers on the Warsaw Stock Exchange

The following paper aims to assess investor reaction to mandatory offers on the Warsaw Stock Exchange, which is important because knowledge about these reactions can be used to make better investment decisions. This paper highlights the importance of procedure in making a mandatory offer and its grounds in the Polish legal system. Additionally, it presents empirical research on the reactions of investors to mandatory offers on the Warsaw Stock Exchange. It has been provided that mandatory offers have a significant impact on the price of a company’s shares listed on the Warsaw Stock Exchange. Knowledge about the reactions of investors to a mandatory offer may be used when selecting securities for an investment portfolio. The findings may provide guidance in deciding whether to begin or end investment in the company, both for individual and institutional investors. The event study methodology approach used in the paper is regarded as valuable and can be the basis for further research in other areas of the capital market research, especially in the context of information efficiency.


Introduction
A mandatory offer for shares is closely linked to a change in the control of a company listed on the public market. The conditions for carrying out such transactions vary significantly, depending on the characteristics of the particular capital market. The first factor considered by this paper is the legislation that shapes the market because it has a direct impact on mandatory offers by delineating exactly how to proceed with certain actions. Second, this paper considers the model of the capital market. It determines the general activity on the mandatory offers market.

Mandatory offers on capital markets
When analysing the issue of mandatory offers, problems of information efficiency in capital markets should be emphasised. Any discussion of that subject should refer to the hypothesis of capital market efficiency (efficient market hypothesis) (Roberts, 1967;Fama, 1970). The efficient market hypothesis assumes that all available information about securities, including public announcement on mandatory offers, is reflected in the prices of shares at any time. Deviations from the informational efficiency are referred to as "capital market anomalies". They usually relate to the time of the transaction, delayed reactions of investors to information, overreactions of market participants in response to incoming information and momentum strategy (Szyszka, 2003). According to the classic definition of capital market efficiency, prices immediately

Investor Reaction to Mandatory Offers on the Warsaw Stock Exchange
Investor Reaction to Mandatory Offers on the Warsaw Stock Exchange reflect available information. However, information can surprise investors. The reaction to returns in this case may be delayed, which creates an opportunity for investors to achieve above-average returns. This phenomenon could also be observed in the event of a mandatory offer for shares on the public market.
In the context of the information efficiency of capital markets, there are various types of research that can be carried out. One type analyses the formation of abnormal returns in the period preceding and following the announcement of a mandatory offer for shares on a public market. The assumptions of market participants about a possible mandatory offer for shares of the company and its announcement may cause a positive reaction in the market, which can be reflected in an increase in share price. When the information is delayed and spread out over time, investors can obtain above average returns.
In Poland, the mandatory offer for shares is governed by the Act of 29 July on Public Offer and the Condi-

Event study analysis
One of the characteristics of capital markets is that during each day, a large quantity of information arrives. There are announcements of mergers and acquisitions, information about the conclusion of major contracts, adjustments to financial results, and the elections of the management board members of companies. Additionally, there is information not directly connected to specific companies. For example, information arrives about economic or political issues. Participants in the market make decisions regarding the purchase or sale of shares in certain companies under the influence of this flood of information. Event study analysis is usually defined as the analysis of the effect on the market value of a company by particular facts, circumstances of the activities, or the environment of a particular entity (Binder, 1998;Craig, 1997 The event study methodology is commonly used to assess investors' reactions to many different events: announcements about splits of shares (Fama, Fischer, Jensen & Roll, 1969), changes in the dividend policy (Aharony & Swary, 1980;Amihud & Murgia, 1997;Charest, 1978;Divecha & Morse, 1983;Kwan, 1981;Pattel & Wolfson, 1984), issuance of new shares (Asquith & Mullins, 1986;Kolodny & Suhler, 1985;Masulis & Korwar, 1986), repurchase of shares (Dann, 1981;Szyszka & Zaremba, 2011;Vermaelen, 1981) as well as recommendations of analysts (Barber & Loeffler, 1993;Beneish, 1991;Davis & Canes, 1978;Liu, Smith & Syed, 1990). The general aim of event study analysis is to determine the impact of the particular event on the value or volume traded of shares of a particular company listed on the stock exchange. To carry out the research, the date and circumstances of the event occurrence should be identified.
It should be noted that the publication of new information relating to a specific company is usually understood as the event in question. The company may cause the event directly (coming from the company, related to the company's activities) or indirectly (the source of information may be another entity).
When conducting event study analysis, it is crucial to determine the parameters of the event window and the estimation window. The event window is defined as a period of time (measured in days, weeks, months or even years) in which changes in price or the volume of shares traded for the selected companies are to be analysed. The estimation window is the period in which the parameters of appropriate models are estimated. Next, these parameters are used to generate the expected returns of shares in the event window. The estimation window is usually immediately prior to the event window.
The next step of the analysis is to determine the relation between the returns of a company's shares and the returns of an index, which represents a market portfolio. The calculation of abnormal returns can be made in different ways, e.g., using the market model, the capital asset pricing model, the mean model or the index model. The most common model to use is the market model. In this paper, abnormal returns are calculated in accordance with the following formula: where: r AR -abnormal rate of return, r it -rate of return on the particular company's shares, α i and β i, -parameters estimated in estimation window using the classical least squares method, r mt -rate of return on market portfolio.
After calculating the abnormal returns, the cumulative abnormal returns in the event window for each company from the sample are computed. Subsequently, the mean abnormal return for each trading day in the event window is computed, which gives the average cumulative abnormal returns.
Because a statistical inference is verified at a later stage, the application of appropriate statistical tests is required. One method of statistical significance verification is a traditional Student's t-test. However, sometimes this statistic is not sufficient and cannot be used in general. Therefore, nonparametric tests must be applied, e.g., rank tests or simulation methods, especially bootstrap methods (Efron, 1979;MacKinnon, 2006).

Empirical study of the investors' reactions to mandatory offers
The research conducted in this paper is based on the The statistical significance verification of the average abnormal returns was conducted using a modified Student's t-test and a nonparametric Corrado rank test (Cor-rado, 1989;Corrado, 1992) The profile of the average cumulative abnormal returns for the entire period is as follows: this particular rate of return rises from t = -5 to t = 1, which is followed by a reversal and decline. Similar phenomena regarding the average cumulative abnormal returns are observed for mature markets (Asquith, 1983;Dodd & Ruback, 1977;Jensen & Ruback, 1983;Keown & Pinkerton, 1981). U.S. market research has shown that in the period preceding the announcement, the average cumulative abnormal returns are more or less at a constant positive level, experiencing a fairly significant increase in the days immediately preceding the announcement of the mandatory offer (Dodd & Ruback, 1977;Lewandowski, 2000). Such movement in the average cumulative abnormal returns can be interpreted as a reflection of event anticipation by the market participants, as well as insider trading.
Investor Reaction to Mandatory Offers on the Warsaw Stock Exchange    Comparing changes in the average cumulative abnormal returns over the sessions from t = -5 to t = 2 reveals an interesting result. In the study involving mandatory offers during the bear market phase, there is a slight increase in the value of the average cumulative abnormal returns in sessions from t = -5 to t = -1. Immediately following that period, there is a sharp increase in the average cumulative abnormal returns from a level near 2 per cent up to a value of 7.61 per cent in session t = 2. This is markedly different from the recovery phase. During that phase, the dynamic growth observed in sessions from t = -5 to t = -2 and subsequently until session t = 1 remains moderate.

Investor Reaction to Mandatory Offers on the Warsaw Stock Exchange
As highlighted earlier, there are different types of studies of the information efficiency of capital markets. Based on our analysis, it can be unequivocally stated that the anticipation of market participants' reactions to a possible mandatory offer for shares induces a positive market reaction, which is reflected in an increase in share prices.
Bearing in mind the efficient market hypothesis and the above analysis of investor reaction to the mandatory offer, it can be stated that some investors may have information about the mandatory offer before the scheduled announcement. This hypothesis is reflected in the fact that the average cumulative abnormal return begins to grow steadily in the third session preceding the date of announcement of the mandatory offer. This may be due to institutional investors who can anticipate the event through access to more information and more detailed analysis. They can achieve an advantage over individual investors. The rise in the average cumulative abnormal returns could also be caused by some investors having inside information.
From the perspective of an individual investor, the possibility of investing based on information about the announcement of a mandatory offer seems limited. Based on the results, a general guide for individual and institutional investors on when to exit an investment can be formulated. In should be noted that after the announcement of the mandatory offer, there is a fall in the average cumulative abnormal returns, so the investor should sell their shares immediately after the mandatory offer.
In formulating general conclusions, it should also be noted that the design of the mechanism of mandatory offers has a significant impact on the investors' reactions. Compared to studies of the same scope carried out on the Polish market for the years 1998 -2001, it can be observed that mandatory offers are currently reflected in the share prices much later (Lewandowski, 2000;Szyszka, 2003). These differences could be the result of reforms to capital markets law, especially the Act of 29 July on Public Offer and the Conditions for Introducing Financial Instruments to the Organized Trading System, and on Public Companies.

Conclusions
The mandatory offers have a significant impact on the price of shares of companies listed on the Warsaw Stock Exchange. In should be noted that in this case, the investors' reactions are delayed and spread over time, which creates the opportunity for aboveaverage returns. The delayed reaction confirms that information inefficiencies occur in the Polish capital market. This result is contrary to the efficient market hypothesis. Knowledge about the investors' reactions to mandatory offers may be used when selecting securities for an investment portfolio. Our findings may provide guidance for the decision to enter or exit from an investment in a company, both for individual and institutional investors.
This paper contributes to part of a wider discussion about the use of potential of capital market efficiency in the investment process. It confirms previous research in the area of efficiency and the Polish capital market. This work has discussed issues regarding event study analysis of the capital market and presented a comprehensive methodology for conducting research related to investors' reactions to mandatory offers on the public market. This approach is very useful and can be the basis for further research on this subject. A comprehensive presentation of the methodology can also be used in studies in other areas of capital markets.