Takeover Announcements Research Articles

Under the microscope: Trade initiation activities around earnings and takeover announcements in a market with continuous disclosure

We examine the impact of the release time of earnings and takeover announcements on trade initiation motives on the ASX — a market with continuous disclosure. This investigation uses intraday high-frequency data of the constituent stocks of the S&P/ASX50 index and measures market sidedness around the announcements to infer trade initiation motives. We find that during a continuous trading session: (i) in a two-sided market, investors initiate both buy and sell trades just before announcements are released during trading sessions, and (ii) in a one-sided market, investors execute either buy or sell trades just after the announcements. Our results suggest that differential information is the likely motive for trade initiation just before the release of announcements. Finally, our results suggest that announcements released during continuous trading sessions are more effective in controlling information leakage.

Takeovers, Freezeouts, and Risk Arbitrage

This paper develops a dynamic model of tender offers in which there is trading on the target’s shares during the takeover, and bidders can freeze out target shareholders (compulsorily acquire remaining shares not tendered at the bid price), features that prevail on almost all takeovers. We show that trading allows for the entry of arbitrageurs with large blocks of shares who can hold out a freezeout—a threat that forces the bidder to offer a high preemptive bid. There is also a positive relationship between the takeover premium and arbitrageurs’ accumulation of shares before the takeover announcement, and the less liquid the target stock, the stronger this relationship is. Moreover, freezeouts eliminate the free-rider problem, but front-end loaded bids, such as two-tiered and partial offers, do not benefit bidders because arbitrageurs can undo any potential benefit and eliminate the coerciveness of these offers. Similarly, the takeover premium is also largely unrelated to the bidder’s ability to dilute the target’s shareholders after the acquisition, also due to potential arbitrage activity.

The Market for Corporate Control as a Limit to Short Arbitrage

AbstractWe hypothesize that corporate takeover markets create significant constraints for short sellers. Both short sellers and corporate bidders often target firms with declining economic prospects. Yet, a target firm’s stock price generally increases upon a takeover announcement, resulting in losses for short sellers. Therefore, short sellers should require higher rates of return when the takeover likelihood is higher. Consistent with this prediction, the return predictability of monthly short interest increases with industry-level takeover probability and decreases as takeover defenses are implemented. Our results suggest that efficient takeover markets create trading frictions for short sellers and can therefore inhibit overall market efficiency.

Financial constraints and financing sources in mergers and acquisitions

We study the effects of financing sources and financial constraints in mergers and acquisitions. We explicitly distinguish between methods of payment and financing used in takeovers and find that financial constraints have a strong influence on choices of both payment and financing methods. Financially constrained firms are less likely to pay for acquisitions in cash. Greater financial constraints are associated with greater use of equity financing, followed by internal funds, with debt as the least preferred financing alternative. Consistent with agency theory, more constrained bidders experience higher takeover announcement returns. However, we find financing sources to have little impact on abnormal returns.

Does Target Firm’s Earnings Management Affect Shareholder’s Gains? Evidence from China

This study tests the hypothesis that the target firms are involved in earnings management activities in quarters leading to a takeover announcement. Using a sample of 3,455 Chinese listed firms that are targets of successful acquisitions over the period 2007–2020, and for a matched sample of non-targets, we find that target firms manipulate earnings in quarters leading to the announcement date. Further, we find evidence of a negative relationship between earnings management and short-term gains to shareholders. Our result remains robust after controlling for various deal characteristics. The study also suggests that pre-merger earnings management in target firms is not fully anticipated by the market before the takeover announcement. We find no evidence of earnings management immediately after the announcement quarter.

Options trading prior to takeover rumors

Purpose In this paper, the authors examine options trading in firms that soon become rumored takeover targets. This study also examines whether measures of informed trading can predict target returns (upon rumor announcement and over the post-rumor period) and/or predict which rumors lead to bids. The authors further assess whether the informed trading they observe is more prevalent in the options market or the equity market.Design/methodology/approach This study calculates abnormal options volume using a market-model approach that accounts for different attributes of options trading. The authors construct a control sample and compare equity options trading of firms in their sample with that of the control sample. In addition, the authors fit a series of regressions to examine whether pre-rumor abnormal options trading can predict rumor accuracy in a multivariate setting.Findings The authors find that the volume of options traded is abnormally high over the pre-rumor period while the direction of option trades (abnormal call volume minus abnormal put volume) prior to takeover rumors predicts forthcoming takeover announcements, rumor date target firm returns and post-rumor target firm returns. The results are robust when controlling for publicly available information, when using a control sample, and when using alternative measures of informed trading.Originality/value This study is the first to provide evidence of informed options trading prior to a broad sample of takeover rumors. In addition, this study contributes to the literature on takeover predictability and profitability by showing that various pre-rumor measures of informed options trading significantly predict bid announcements. The authors also contributes to the literature on price discovery by providing evidence that informed investors are more likely to trade in the options market than in the equity market during the pre-event period.

Modelling multiperiod patterns in stock-market reactions to events, with an application to serial acquisitions

In event studies, the now standard window of a few days may miss relevant price movements if the market’s reaction to the news announcement tends to be slow or if the initial reaction tends to be partially or wholly undone afterwards. We propose a parsimonious hybrid of splines and Almon lags to detect and classify various patterns of post-event reactions spread over many periods. The scheme can interact with one or more event characteristics (like deal size), and the resulting non-linear model can be estimated via maximum likelihood (ML).In our application, we study the returns pattern that follows takeover announcements by two leading serial acquirers, AB Inbev SA and Heineken. Our method confirms the presence of a drop-and-recovery pattern as reported in Doan and Sercu (2021), but the amplitude of the pattern shows no link with deal size. This last finding is not in line with the view that the pattern reflects a rise in uncertainty that is slowly resolved (Malatesta and Thomson, 1985).

Target insiders' preferences when trading before takeover announcements: Deal completion probability, premium and deal characteristics

AbstractWe contribute to the M&A literature by characterizing the information available to target insiders during the pre‐public takeover negotiations. We analyze insider trading in target firms in the US between 2005 and 2018. First, we show that signing confidentiality agreements is an important information threshold. Second, insiders have a good grasp of deal success. They increase their net purchases only in deals with higher completion probability. Third, insiders guess the final offer price well, but their trading strategies additionally reflect their knowledge of deal characteristics. They prefer bidder‐initiated, cash, privately negotiated, and strategic deals. Insiders combine several sources of information.

CEO pay disparity, takeover premiums and bidder performance in Australia: efficient contracting or managerial power?

AbstractWe compare acquiring firms’ CEO pay with that of the highest‐paid non‐CEO director and investigate the influence of CEO pay disparity on takeover premiums and bidder performance. Based on a takeover sample of Australian listed targets and bidders during the 2002–2015 period, we find that takeover premiums are significantly higher if the deals are processed by acquiring firms with higher CEO pay disparity. Although these firms do not receive favourable immediate market responses to their takeover announcements, they outperform in the long run. We find no evidence that offering a large takeover premium harms shareholders’ wealth. Overall, our findings largely support efficient contracting theory in the Australian M&A context.

Savvy Target Insiders’ Trading Before Takeover Announcements

We contribute to the M&A literature by characterizing the information available to target insiders during the pre-public takeover negotiations. We analyze insider trading in target firms in the US between 2005 and 2018. First, we show that signing confidentiality agreements is an important information threshold. Second, insiders have a good grasp of deal success. They increase their net purchases only in deals with higher completion probability. Third, insiders guess the final offer price well, but their trading strategies additionally reflect their knowledge of deal characteristics. They prefer bidder-initiated, cash, privately negotiated, and strategic deals. Insiders combine several sources of information.

Merging One's Way to the Top: AB Inbev versus Heineken

AbstractLeuven's Den Hoorn brewery, now AB Inbev SA, has become the world's largest brewing group by far, but critics say the company overpaid for its acquisitions. In this article, we study typical stock market reactions to the many takeover announcements by AB Inbev and the industry's runner-up, Heineken. Unlike Heineken's, the market leader's takeover announcements were met by, on average, a –2% price reaction in the stock market in the announcement month, but most of that is already undone in the next month. For Heineken, the same pattern shows up, only faster: the V-shaped reaction takes a few weeks rather than a few months. Such V-reactions may actually reflect a temporary rise in uncertainty rather than overpaying. The finding that reactions are reversed and heterogeneous across firms, raises issues of interpretation and optimal test design of event studies. (JEL Classifications: G12, G14, G17)

Enter Paper Title]Under the microscope: Trade initiation activities around earnings and takeover announcements in a market with continuous disclosure

This paper examines whether release time of earnings and take over announcements influences trade initiation motives. We find that investors’ initiate buy and sell (buy or sell) trades immediately before (after) earnings and takeover day announcements. Volatility is high and effective spread is prominent before overnight announcements. This result suggests active informed trading and potential information leakage. Similarly, high volatility and less prominent effective spread before day announcements imply active uninformed trading. Private information (Differential information) is the likely motive for trade initiation before overnight announcements (day announcements). These results show that release time of firm-specific announcements matter in terms of influencing trade initiation motives and market dynamic variables. Our results suggests that day announcements are more effective in controlling information leakage than overnight announcements and complements prior literature on effectiveness of continuous disclosure on the ASX.

Do single takeovers outperform corporate acquisition programs Evidence from the French stock market

This paper compares the profitability of French acquiring firms following the launch of corporate acquisition programs with that of single takeovers, by examining wealth of acquirers in both cases. While using the event study methodology for the calculation of abnormal returns for single takeovers, this study also considers the model of partially anticipated events for the assessment of the economic impact and the announcement effect of acquisition attempts. For the acquisition programs, we used a sample containing 46 French active acquirers, which launched 97 acquisition attempts between 1997 and 2007. For single takeovers, we examined 23 acquisitions by the same acquirers. The results of this study show that French investors obtain positive returns during and around the month of takeover announcement. French acquirers earn an average of 3.75% in two months, the month of announcement and the following month, and 4.02% in the month of announcement and the month preceding the announcement. These results show that single takeovers outperform corporate acquisition programs, since these same French acquiring firms do not generate any profitability following the launch of these investment programs.

Insider trading in rumored takeover targets

AbstractWe examine insider trading surrounding takeover rumors in a sample of 1,642 publicly traded US firms. Using difference‐in‐differences regressions, we find that insider net purchases increase within the year prior to the first publication of a takeover rumor, particularly when rumor articles are either accurate (lead to a takeover announcement) or informative (provide substantial justification for the rumor's publication). Moreover, we find abnormal insider trading to be a significant predictor of takeover announcements occurring within the following year. Finally, passive net purchasing (i.e., selling less rather than buying more) is more pronounced among managing insiders than among non‐managing insiders.

When Does Corporate Social Responsibility Backfire in Acquisitions? Signal Incongruence and Acquirer Returns

This study examines whether an acquirer’s pre-announcement corporate social responsibility (CSR) engagement can provide an insurance-like effect to preserve acquirer returns during the announcement of an acquisition event. Drawing on stakeholder theory and signaling theory, we posit that CSR engagement accrues positive moral capital for an acquirer and sends a positive signal indicating the acquirer’s altruism, both of which temper stakeholders’ negative responses and prevent a reduction in market returns around the announcement of an acquisition. However, high-CSR engagement could backfire when the acquirer makes a hostile takeover announcement. Incongruent signals between high-CSR engagement and the hostile practice are a sign of hypocrisy in the eyes of stakeholders, which can worry investors and hurt acquirer returns. By analysing 1310 acquisition transactions from 2002 to 2012, the results of our event study show that high-CSR acquirers generally enjoy positive acquirer returns during their acquisition announcements, but negative returns when the acquisitions are hostile. These findings support the idea that CSR engagement can provide insurance-like benefits during an event that is often seen as “negative”, while also identifying signal incongruence as an important boundary condition.

When Does Corporate Social Responsibility Backfire in Acquisitions? Signal Incongruence and Acquirer Returns

This study examines whether an acquirer’s pre-announcement corporate social responsibility (CSR) engagement can provide an insurance-like effect to preserve acquirer returns during the announcement of an acquisition event. Drawing on stakeholder theory and signaling theory, we posit that CSR engagement accrues positive moral capital for an acquirer and sends a positive signal indicating the acquirer’s altruism, both of which temper stakeholders’ negative responses and prevent a reduction in market returns around the announcement of an acquisition. However, high-CSR engagement could backfire when the acquirer makes a hostile takeover announcement. In-congruent signals between high-CSR engagement and the hostile practice are a sign of hypocrisy in the eyes of stakeholders, which can worry investors and hurt acquirer returns. By analysing 1,310 acquisition transactions from 2002–2012, the results of our event study show that high-CSR acquirers generally enjoy positive acquirer returns during their acquisition announcements, but negative returns when the acquisitions are hostile. These findings support the idea that CSR engagement can provide insurance-like benefits during an event that is often seen as “negative”, while also identifying signal in-congruence as an important boundary condition.

The effect of securities class action lawsuits on mergers and acquisitions

This paper investigates whether shareholder class action litigation affects the takeover candidacy, premium, and completion rate of mergers and acquisitions involving defendant target firms. We use a comprehensive dataset of publicly traded U.S. firms that became the targets of takeover bids between 1998 and 2016 and find that firms subject to shareholder class action lawsuits within the previous two years are more likely to be targeted for acquisition while commanding a significantly higher premium. Firms that face such litigation after a takeover announcement experience a significant decrease in takeover completion.

Informed Options Trading Prior to Takeover Rumors

We examine derivatives trading prior to takeover rumors in a sample of 1,638 publicly traded U.S. firms. The volume of options traded is abnormally high over the 5-day pre-rumor period, primarily due to the number of out-of-the-money call options traded. In addition, the direction of option trades (abnormal call volume minus abnormal put volume) prior to takeover rumors predicts forthcoming takeover announcements and rumor date returns. Identifying suspicious trades, we find evidence of individuals trading on knowledge of takeover rumor candidacy in the options market. Our results further indicate that informed traders prefer the options market to the equity market.

Informed Options Trading Prior to Takeover Announcements: Insider Trading?

We quantify the pervasiveness of informed trading activity in target companies’ equity options before the announcements of 1,859 U.S. takeovers between 1996 and 2012. About 25% of all takeovers have positive abnormal volumes, which are greater for short-dated, out-of-the-money calls, consistent with bullish directional trading before the announcement. Over half of this abnormal activity is unlikely due to speculation, news and rumors, trading by corporate insiders, leakage in the stock market, deal predictability, or beneficial ownership filings by activist investors. We also examine the characteristics of option trades litigated by the Securities and Exchange Commission (SEC) for alleged illegal insider trading. Although the characteristics of such trades closely resemble the patterns of abnormal option volume in the U.S. takeover sample, we find that the SEC litigates only about 8% of all deals in it. This paper was accepted by Lauren Cohen, finance.

Abnormal returns and asymmetric information surrounding strategic and financial acquisitions

AbstractUsing takeover bids from the United States, we investigate the importance of information asymmetry in self‐selection when evaluating the abnormal returns of financial versus strategic takeover targets during a period of possible informed trade. Sample selection bias due to differences in financial versus strategic takeover bid information environments is controlled for using Heckman's model. Results show that takeover announcements are not randomised, indicative of timed announcements, and further that private equity firms exhibit lower price impact post‐announcement. We conclude that the long‐term financial motive of private equity takeovers, coupled with higher private information pre‐announcement, leads to lower abnormal returns post‐announcement.