Appraisal Risk and Corporate Disclosure During Mergers and Acquisitions

Abstract

I exploit a 2007 court ruling that significantly strengthens appraisal rights for shareholders of Delaware-incorporated target firms to examine how managers respond to appraisal risk during takeovers. Appraisal rights give target shareholders the right to receive a judge’s determined value for their shares in lieu of the acquirer’s offer. Target-firm disclosures play a critical role in the valuation decisions of judges; and valuation decisions pose a substantial risk to acquirers. I find that heightened appraisal risk induces target managers to withhold positive news arriving between the announcement and effective completion of the takeover. This observation is driven by target managers who are aligned with acquirers. I further document that acquirers benefit from this behavior in the form of a lower likelihood of appraisal and a higher likelihood of positive post-acquisition returns. Overall, my findings suggest that acquirer-target manager ties play an important role in facilitating the dilution of target shareholder property rights.