Two Different Exits : Prediction and Performance of Stocks that are About to Stop Trading

Mergers and drops are two of the most common reasons for firms to stop trading in the market. Both tend to be younger than the average and more likely to be growth stocks. Their stock returns, however, are very different -- firms that are about to drop have negative and volatile returns, while firms that merge have had high returns of lower-than-average volatility. Using a standard logit hazard model, we predict drops and mergers at short horizons and calculate predicted probabilities of these events. Portfolios of firms that are about to merge have positive Fama and French 3-factor and 5-factor alphas, though this is partly driven by positive momentum. Firms that have a high probability of dropping have negative alphas that lie between -1.8\% and -4\% per month; returns are imperfectly correlated with distress anomaly returns and average underperformance is significantly more pronounced for drop stocks. Results are robust to predicting returns using Fama and MacBeth regressions