Abstract
We examine the reasons why some bidders choose to voluntarily announce a merger negotiation before the signature of a definitive agreement. We propose an “announce-to-signal” explanation: early announcements allow bidders to signal to the target shareholders high synergy of the transaction, so as to overcome negotiation frictions and improve success rates. However, early announcements raise the target’s reservation price. In equilibrium, bidders rationally tradeoff higher success rates and costs. Consistent with this explanation, we show that a bidder’s weak bargaining position predicts an earlier announcement. Early announced transactions are associated with higher expected synergies and completion rates. Public competition and offer premium are also higher in these transactions, consistent with costly signaling. However, bidder announcement returns do not suggest the existence of overpayment in early announced deals.
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