Anticipation, Acquisitions and Bidder Returns

Abstract

This paper develops and tests the anticipation hypothesis as applied to bidding firm returns and the returns of their rivals. Our results provide strong support for anticipation throughout an industry and are suggestive of the type of information a bid reveals. First, the abnormal returns of bidding firms are significantly related to the degree of surprise surrounding a bid announcement. Second, at the time of an initial industry announcement, rival firms that will also become bidders in the near future experience significant and differential price adjustments. Third, these price adjustments are proportional to the abnormal returns earned by the initial industry bidder. Our results hold after controlling for variables typically associated with acquiring firm returns. Less anticipated bidding activity is, on average, a wealth creating activity. Moreover, the magnitude of the anticipation effect is large enough to alter some well known results. For example, the literature documents that bidders in stock acquisitions earn significantly negative returns. The same result is found in the literature for bidders seeking publicly traded targets. We find that bidders in less anticipated acquisitions earn significantly positive abnormal returns in stock acquisitions and insignificant returns in acquisitions of public targets. Thus, the magnitude of the anticipation effect is larger than that associated with either form of payment or organizational form of the target.