Target Firm Abnormal Returns Research Articles

Does Terrorism Affect Acquisitions?

Using terrorist attacks as an exogenous shock to uncertainty, we provide evidence that firms located near terrorism-stricken areas are less likely takeover targets for two years after the attack and receive lower acquisition premiums. The latter finding is reflected in lower target firm abnormal returns and synergy gains. Additionally, in terrorism-stricken areas, target firms are associated with a lower share of synergies, withdrawn deals rise, and acquirers are more likely to get involved in acquisitions of target firms located in different metropolitan statistical areas than their own or acquire faraway target firms. We attribute our results to the real options theory, which predicts that high uncertainty increases the value of the option to delay investments. Additionally, we show that the impact on target firm human capital and acquirer CEO uncertainty and fear are potential sources of terrorism-induced uncertainty with the former source prevailing over the latter. This paper was accepted by Gustavo Manso, finance. Supplemental Material: The online appendix and data are available at https://doi.org/10.1287/mnsc.2022.4506 .

Terrorism and Corporate Acquisitions

Using terrorist attacks as an exogenous shock to uncertainty, we provide evidence that firms located near terrorism-stricken areas are less likely takeover targets for two years after the attack and receive lower acquisition premiums. The latter finding is reflected in lower target firm abnormal returns and synergy gains. Additionally, in terrorism-stricken areas, target firms are associated with lower share of synergies, withdrawn deals rise, and acquirers are more likely to get involved in cross-MSA acquisitions or acquire faraway target firms. We attribute our results to the real options theory which predicts that high uncertainty increases the value of the option to delay investments. Additionally, we show that the impact on target firm human capital and acquirer CEO uncertainty and fear are potential sources of terrorism-induced uncertainty with the former source prevailing the latter.

Measuring Deal Premiums in Takeovers

We investigate whether the merger announcement dates provided in the Securities Data Corporation (SDC) database are handled correctly by researchers performing event studies. We find that in 24.1% of deals, the popular choice of using the SDC's “Date Announced” field as the event date leads to biased estimates of target firm abnormal returns because of earlier abnormal price movements due to merger‐related events such as merger rumors or search‐for‐buyer types of announcements. We hand collect the merger‐related events from news sources and make the complete data set publicly available at the Financial Management website.

Capital Punishment: Signaling Takeover Intentions by Raising Capital

Using a sample of 1060 takeover announcements from 1982 to 2006, this study is the first to document significant short-run cumulative average abnormal returns (CAARs) in target firms occurring at the time bidding firms last announced raising capital prior to the takeover bid. These target CAARs are substantially higher in combination with other documented takeover signals, such as when takeover bids have recently occurred within the same target industry, when bidding and target firm industries are related, when the stated purpose of funds raised is for acquisitions or financial flexibility, and when bidder toeholds exist. Investors thus appear to use the public signal of raising capital to anticipate forthcoming takeover attempts, supporting previous findings that not all pre-bid target firm abnormal returns can necessarily be attributed to insider trading. In addition, both higher target run-ups and higher takeover premiums result when bidding firms raise capital nearer the acquisition announcement date (as compared to matched firms not raising capital, or raising capital much earlier), effectively punishing bidders for this 'revelation' of takeover intentions. ---------------------- I would like to thank Professors Malcolm Baker, William Bertin, Robert Bruner, Sean Cleary, Ming Dong, Louis Gagnon, David Goldreich, Lew Johnson, John J. McConnell, Fabio Moneta, Micah Officer, Lynnette Purda, Fatma Sonmez-Saryal, Wulin Suo, Karin Thorburn, Marc Umber, and Wei Wang for their helpful comments. I also benefitted from the comments of participants at the 2010 European Financial Management Association Annual Meeting, the 2010 Financial Management Annual Meeting, the 2010 Northern Finance Conference, the 2010 Southern Finance Association Annual Meeting, and various seminars.

Measuring Deal Premiums in Takeovers

We investigate whether the merger announcement dates provided in the Securities Data Corporation (SDC) database, a commonly used source in mergers and acquisitions (M&A) research, are handled correctly by researchers performing event studies to measure the wealth effects of mergers. We find that in a non-trivial number of deals, the popular choice of using the SDC’s “Date Announced” (DA) field as the event date leads to biased estimates of target firm abnormal returns because of earlier abnormal price movements due to merger-related events such as merger rumors or search-for-buyer types of announcements. We capture market reactions around these early dates with the “Original Date Announced” (ODA) field in the SDC database. Target firms’ stock prices increase by an average of 12.6% around the ODA and another 11% around the DA. We argue that the proper event windows should include the market reactions around both dates. Our analysis also includes the characteristics of target firms that are involved in such events, acquirer abnormal returns around the ODA and the accuracy of the ODA in capturing the early dates.

Foreign takeovers of Australian listed entities

This study examines if Australian target firm abnormal returns and characteristics differ between Australian and foreign bidders. The results indicate that takeovers from foreign bidders are associated with higher target firm abnormal returns than bids from Australian firms. Overseas bidders also pay an additional premium for research-intensive target firms. Target firms that receive an offer from outside Australia are significantly larger, have lower leverage, and are more likely to operate in the resources sector. Foreign acquisitions are also more likely to be a friendly takeover. The relative exchange rate is not associated with the likelihood of a foreign takeover. There is no difference in takeover success or competition between domestic and foreign bids.

The Influence of Target Shareholder Taxation on Premiums and Abnormal Returns in Takeovers

Prior to December 1999, shareholders that sold their shares into Australian takeovers have been taxable on capital gains irrespective of the form of payment. Subsequent to this date shareholders can elect to rollover gains when equity is received as consideration. We examine the effect of this regulatory change on the association between target shareholder capital gains and both takeover premiums and shareholder wealth. Inconsistent with the target shareholder taxation being important the results indicate that target shareholder capital gains are unrelated to takeover premiums and target firm abnormal returns. Additionally, we find that cash consideration increases target shareholder returns for reasons other than taxation.

Target Firm Returns: Does the Form of Payment Affect Abnormal Returns?

Research indicates that at the time of a takeover announcement, target firm shareholders receiving cash earn larger abnormal returns than those receiving stock. Our work confirms that cash targets receive larger direct payments from bidders and that the size of target firm abnormal returns is related to the relative size of this direct payment. Once we control for the size of the payment, however, we find the target firm abnormal returns to be unrelated to the payment method. Thus the relationship between payment method and target firm abnormal returns is indirect. This finding is important because it casts doubt on the signaling (asymmetric information) hypothesis. That is, cash offers do not seem to be valued by the market as a means of reducing this uncertainty. Something else, such as the tax implication differences between cash and stock offers, drives cash target firms to demand larger payments from bidding firms.

Cash Flow, Earnings, and Corporate Control

This paper examines the ability of cash flow and earnings based measures of return to assess the differences between target firms and their industries and to explain target firms' abnormal returns during the takeover period. In a sample of 63 completed takeovers over the period 1977 to 1989, takeover targets have mean cash flow to total assets and earnings to total assets below their industry average in each of the three years preceding the year of the takeover. If these ratios are interpreted as measures of managerial performance, the implication is that target firms were underperformers which may have been taken over for a better use of their asset potential. Target firm abnormal returns observed during the takeover period are significantly related to both the difference between target firm and average industry earnings to total assets and to the difference in cash flow to total assets. Abnormal returns are negatively related to the difference in earnings to total assets, suggesting that target firm assets are indeed underutilized. The difference between target firm and target industry cash flow to total assets is positively related to target firm abnormal returns, suggesting that acquiring firms value the near term cash flow of targets.

Target Firm Abnormal Returns and Trading Volume Around the Initiation of Change in Control Transactions

This study examines the average abnormal returns, average abnormal trading volume, and reported insider trading of corporate control target firms during a period of possibly informed trading. This period begins on the unpublicized initiation date (as reported in a postannouncement date proxy statement or 14-D1) and ends on the publication date of the first Wall Street Journal story signalling an impending change in corporate control. We find that the preannouncement date average abnormal return noted by other researchers begins after the unpublicized initiation date of the transaction. We find no evidence of the preannouncement date average abnormal trading volume noted by previous researchers; instead, we find average abnormal volume beginning with the first public information regarding the transaction.

Value Added and Corporate Control in the U.S.

AbstractThis paper examines the ability of value added to assess the differences between target firms and their industries and to explain target firms' abnormal returns during the takeover period. In a sample of 234 completed takeovers over the period 1977 to 1989, takeover targets have lower value added to total assets ratios than other firms in their industries in the year preceding the year in which the takeover is completed. Target firm abnormal returns observed during the takeover period are positively related to the difference between target Firm and average industry value added to total assets. This suggests that while acquired firms are on average underperformers, acquiring firms value the access to, and possibly the ability to redistribute, the resources of target firms.