Anticipation and Timing in Takeover Waves

Abstract

This paper examines the hypothesis that, during merger waves, a bidder's actions are informative for other bidders and the market. I develop a real options model to explore the interplay between acquisition timing and the market reaction to these events in the context of merger waves. The model predicts a pattern of declining announcement returns along the merger wave and novel forms of contagion returns. I take these contagion predictions to the data in a sample of U.S. industries that underwent regulatory changes in the 1990s. Consistent with the model's predictions, I find that the dispersion in bidders' post-acquisition performance declines along the merger wave and that the start of a merger wave is associated with an increase (decrease) in the conditional correlation of bidders' stock returns and the stock returns of other bidders (a broad stock index). These theoretical and empirical results suggest that a rich set of channels of contagion returns and deal anticipation are at play during merger waves.