Intention to Acquire and M&As: Evidence from European IPOs

Abstract

In this study, we examine whether an IPO’s voluntary disclosure on the intention to engage in future M&A activity affects the market reaction to a subsequent acquisition and whether it is related to the acquisition’s long-run performance. Using a dataset of European IPOs during the period 2001–2017, we first document that disclosers are more likely to engage in future M&A activity than non-disclosers, thus supporting that such costless disclosures are credible. Secondly, we document a less positive market reaction around the announcement of an acquisition for disclosers than for non-disclosers, consistent with the anticipation hypothesis. Additional analyses suggest, however, that the market reaction is stronger and positive for target firms in countries with weak shareholder protection and legal environment and lower information quality. This suggests that when the acquisition is deemed more uncertain, the market perceives the disclosure of the intention to acquire as capturing a more diligent acquisition plan, consistent with the preparation hypothesis. Finally, results show that the long-run performance of the combined entity is more negative for disclosers than for non-disclosers. However, consistent with the market reaction results, this relation is reversed when the acquired company operates in a poor investor protection environment, suggesting that these acquisitions are associated with better long-term performance consistent with the conjecture that these acquisitions are also more carefully planned.