Relative Values, Announcement Timing, and Shareholder Returns in Mergers and Acquisitions

Abstract

We examine the endogenous timing of M&A announcements in terms of the bidder's relative value (ratio of bidder's equity value to target's equity value) at which the deal is announced, and how it compares with the range of relative value during a 52-week reference window preceding the announcement. Accordingly, we create a normalized relative value (NRV) measure, which takes a higher (lower) value if the bidder's relative value at announcement is closer to its 52-week high (low). Even after controlling for the valuations of the bidder and target firms at announcement, we find that deals announced at high NRV are more likely to feature stock payment, have higher offer premium, are more likely to fail, and are associated with lower (higher) announcement returns for the bidding (target) firm. However, bidding firms that announce deals at high NRV earn large positive abnormal returns in the period from one year before announcement to one year after announcement. Overall, our results are consistent with the market-timing hypothesis that, at the margin, bidders strategically choose the timing of M&A announcements to exploit relative misvaluation.