Target Shareholders Research Articles

NAV Ratios and REIT Takeovers: The Role of Public and Private Deal Premiums

We investigate how net asset values (NAVs) impact equity real estate investment trusts (REITs) in the market for corporate control. REITs trading at discounts to NAV are more likely to be acquired than those trading at premiums to NAV. For each acquisition, there is a public deal premium (the deal value relative to stock price) and a private deal premium (the deal value relative to NAV). REITs trading at discounts to NAV command larger public deal premiums and smaller private deal premiums. Shareholders of targets respond more favorably if the REIT is trading at a discount to NAV. Three-day cumulative abnormal returns (CARs) around acquisition announcements are 11% higher for targeted REITs that are trading below a price-to-NAV ratio of 0.95 than those trading at a price-to-NAV ratio above 1.05. The sale of a REIT trading at a discount to NAV appears to be a productive transaction for both acquirers and targets.

Prospect theory in M&A: Do historical purchase prices affect merger offer premiums and announcement returns?

Prospect Theory suggests that when the pre-offer market price is below the historical purchase price, target shareholders may be reluctant to accept a merger offer, because it requires realizing nominal losses. In a sample of all U.S. public firm merger offers in 1990–2019, we find that the acquirer partially compensates target shareholders, including retail investors, for their losses via a higher offer premium. Consistent with Prospect Theory, the marginal compensation decreases with loss size and is higher in cash-only deals. We also show that the extra premium paid hurts (boosts) acquirer (target) shareholders' wealth.

The cost of corporate social irresponsibility for acquirers

Few studies have examined the reputational damage of environmental and social (E&S) scandals ex-post. Using an international sample of mergers and acquisitions (M&A) across 18 countries, we examine whether heightened E&S risks arising from acquirers’ E&S incidents affect the cost of acquisition. We find that the severity of the incident increases acquisition premium and this effect is explained by incident acquirers compensating target shareholders for heightened reputation risks, rather than seeking to repair their reputation through the acquisition. At the country level, incident acquirers in countries with stronger E&S standards and policies also experience higher premium. Further analysis shows that E&S incidents reduce shareholder value upon the announcement of an M&A and increase the time taken for M&A completion. Firms are less likely to make acquisitions after experiencing an E&S incident, but this decision depends on the cost of delay. Finally, we show that the adverse impact on acquisitions dissipates after six months.

Toeholds and information quality in common‐value takeover auctions

AbstractIn this article I analyze the effect of the sensitivity of firm value on the information available to potential acquirers in common‐value takeover auctions with toeholds. I show that the quality of information does not affect equilibrium when bidders have equal toeholds but has a significant effect when toeholds are different. My article demonstrates that increasing the relative information quality of the bidder with a smaller toehold makes both bidders bid more aggressively and leads to a higher price. I also analyze the combined effect of toeholds and information quality on equilibrium bidding strategies and discuss ways target shareholders can increase the expected final price.

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.

Board reforms and M&A performance: international evidence

This research employs a difference-in-differences framework to study the impact of major board reforms on the performance of mergers and acquisitions (M&As). Using an international sample of board reforms implemented in 61 countries from 1985 to 2021, we document a drastic redistribution of wealth from target shareholders to acquirer shareholders after the board reforms in target countries. This effect is most pronounced in M&A transactions that involve the sale of controlling shares, thereby supporting the hypothesis that corporate board reforms mitigate the private benefits of control in the target firm. Furthermore, these reforms increase expected deal synergies, in that deal-level announcement returns are higher after the implementation of the reforms. When country-level institutional quality and legal protection of shareholders are greater, it reinforces the reform effects. Overall M&A activity remains unchanged following the reforms, yet financial bidders complete fewer transactions, implying a reform-induced squeeze-out of financial bidders from the M&A market in the target country. Collectively, these international results are consistent with the predictions of the private benefits of control theory and underscore the role of institutional quality and investor protection in reinforcing the effects of board reforms worldwide.

The value of economic freedom in cross-border mergers

This study examines the impact of economic freedom in mergers and acquisitions (M&A) using a global sample of 6159 takeovers involving acquirers from 56 different countries and foreign targets from 130 countries. The results reveal that acquirers with an economic freedom advantage over their targets experience higher short-run and long-run abnormal returns after controlling for other important country and merger characteristics. At the same time, the level of economic freedom in the target country relative to the bidder country positively impacts target shareholders’ announcement wealth effects and merger premiums. The results are robust to various control variables, industry, year and country fixed effects, modifications to the target sample, and changes to the merger announcement window. These findings add to the institutional theory and suggest that differences in institutional quality, captured as economic freedom advantage, benefit bidders and targets in cross-border M&A.

Bolstering creditor and shareholder protection under the South African and Zimbabwean amalgamation or merger regulatory regimes: Suggestions for company-law reform

This article critically assesses the efficacy of the South African and Zimbabwean merger regulatory regimes in providing suitable shareholder and creditor protection. The article seeks to balance competing goals. On the one hand, merger opportunities should be promoted by reducing regulatory barriers to merger regulation by, for instance, facilitating the implementation of mergers through a less complex procedure and with reduced court interference. On the other hand, the merger regimes ought to guarantee the appropriate and adequate protection of creditors and shareholders, including minority shareholders’ interests. The article focuses on the two comprehensive target shareholder protections — participatory and remedial rights — and two creditor remedies — the creditors’ notice and the solvency and liquidity test. The study establishes that South Africa offers better protection to creditors and shareholders than Zimbabwe. However, in some respects, both jurisdictions can seek lessons from other progressive jurisdictions, including the United States of America, with the state of Delaware as a particular example, and the United Kingdom.

The Development of the Takeover Auction Process: The Evolution of Property Rights in the Modern Wild West

Using a unique, hand-collected sample of US acquisitions, we study the interaction between the legal system and the takeover auction process from 1981 to 2020. We associate the strengthening of the property rights of targets’ boards after the 1989 Time Inc. decision with fundamental changes in the takeover auction process. This strengthening of the boards’ property rights has moved the auction process from a public one to a behind-the-scenes one in which targets’ boards control both the number of bidders and the flow of information. Targets’ boards are more likely to initiate the auction themselves, and the length of the private negotiation process has significantly lengthened. This fundamental change has benefited target shareholders.

The Consequence of Takeover Methods: Schemes of Arrangement vs. Takeover Offers

This paper examined the effect of two selling processes in the UK market: takeover offers and schemes of arrangement. The latter is argued to allow a bidder to acquire a target company more cheaply and easily because schemes provide a lower threshold of the target company’s shares before “squeeze-out” procedures may be used. To address potential self-selection bias arising from bidders’ ability to choose their acquisition method, the propensity score matching methodology was applied to 803 takeovers of listed-target firms from 1995–2018. The results showed that the scheme of arrangement significantly reduces the target shareholders’ gain relative to the takeover offer.

Appraisal rights and corporate disclosure during mergers and acquisitions

Target shareholders have the right to ask for a higher merger price if good news emerges after a merger agreement. This “appraisal right” varies with state law and was substantially strengthened in Delaware in 2007. I examine how target managers respond to changes in this right. If target managers represent target shareholders, the managers would be more likely to release good news, but I find they are more likely to withhold good news when appraisal rights are higher. This suggests agency problems and collusion on the part of target managers, and thus my paper adds to the larger literature that considers agency problems on the part of managers.

The Devolution and Inevitable Extinction of the Continuity of Interest Doctrine

The continuity of interest doctrine, in its present form, is the extrastatutory requirement that the historic shareholders of a target company must retain a quantum of equity interest in the acquiror in order for an acquisition to qualify as a reorganization entitled to tax-free treatment. If sufficient stock of the acquiror is not retained by the target's shareholders for a long enough period, the transaction is not a tax-free reorganization, and the target corporation and target shareholders (including those that did retain the acquiror's stock) are subject to tax on their gains. On the other hand, because the doctrine is not an anti-abuse rule, if the continuity of interest requirement is not met, the target and its shareholders are entitled to recognize any loss on the transaction.This summary of the doctrine and its consequences is, of course, greatly simplified. Every aspect of the continuity of interest doctrine carries with it a formidable array of complex issues. For example, for how long must the target's shareholders have held their stock to be considered "historic" shareholders? What types of interests in the target qualify as equity for purposes of the test? What type and quantum of continuing interest in the acquiror is required, and for how long and in what form must it be retained? Some of these questions have recently attracted significant attention as a result of a Tax Court case, J.E. Seagram Corp. v. Commissioner, newly issued regulations under section 338, and an announcement that the Internal Revenue Service is considering a comprehensive reassessment of the doctrine.

Collective Action Problems in Chinese Takeover Rules: Deficiency and Difficulty in Protecting Target Shareholders in a Hybrid Regime

China is in a process of upgrading its corporate law and corporate governance regime. The reform involves a learning process of incorporating corporate governance norms from other jurisdictions. In the field of takeover rules, China’s hybrid regime is a combination of some elements from both the US model and the UK model, reflecting China’s pragmatic approach towards rule of law and legislative reform. Though flexible and pragmatic, this transplant approach without taking into account China’s own economic, social and even political scenarios is of little help to address the agency problem embedded in China’s concentrated shareholding model faced by its SOEs and family–controlled enterprises let alone the shareholder protection rules investors are keen to have. A comparative study is conducted in this article to investigate the collective action problems the Chinse takeover rules fail to address. Autonomy of sport, Private International Law, Public-private Governance, Corruption, Transnational Legal Order, Sports Economy, Legal Status of Sporting Organisations, Audit, Managerial Transparency, Economic Monitoring, International Sporting Convention

Law Firm expertise and shareholder wealth

AbstractThis paper examines the impact of law firm expertise on bidder and target shareholder wealth gains during mergers and acquisitions. After controlling for endogeneity in the matching between the mandating firm (bidder or target firm) and the law firm, we find that top‐tier law firms increase the wealth of bidder shareholders by an average of 2.00% ($30.80 million) to 3.07% ($47.28 million). This does not hold for target firm shareholders. Interestingly, we find no evidence that the reputation of the investment bank is related to bidder or target shareholder wealth gains. Our findings suggest that top‐tier lawyers are effective “transaction cost engineers.” They create value for their clients by structuring deals to minimize transaction and regulatory costs.

Strategic Nondisclosure in Takeovers

ABSTRACTWe examine takeover auctions when an informed bidder has better information about the target value than a rival and target shareholders. The informed bidder's information is either hard or soft, and only hard information can be credibly disclosed. We show that withholding information creates a winner's curse, thereby serving as a preemption device that deters the rival's participation. In turn, an endogenous disclosure cost arises that induces the informed bidder to optimally withhold favorable information to minimize the acquisition price—breaking down the standard unraveling result, even if his information is always hard. Perhaps surprisingly, stronger competition from the uninformed bidder can reduce the target shareholders' payoff and increase the payoff of the informed bidder while unambiguously improving social welfare. Moreover, “hardened” information can reduce the gains to trade, decreasing welfare, but increasing shareholders' payoff. Our results provide a cautionary note to promoting more competition and more disclosure.JEL Classifications: D44; D82; G34; M41.

Institutional cross-ownership, heterogeneous incentives, and negative premium mergers

Cross-owners, investors who have stakes in both the acquiring and target firms, are likely to focus on the total portfolio wealth effects from mergers and acquisition transactions, rather than the wealth effects of the target or bidder. Cross-owners may be less concerned with value destroying deals because their lack of gains, or even losses, as ownership in the acquiring firm can be offset by benefits derived from their ownership in the target firm. In contrast, shareholders with no cross-ownership, but own shares in either the target or the acquiring firm only, consider the value prospects for the target, thus producing heterogeneous incentives among shareholders to accept an offer. We investigate this heterogeneity within targets of 481 US negative premium deals and find substantial heterogeneity in acquisition incentives within the target firm shareholder base. Target shareholders in negative premium acquisitions experience negative wealth effects, but institutional cross-owners of negative acquisition premium deals realize positive wealth effects. We also find strong evidence of a size effect, where the observed wealth effects are amplified in larger deals. The divergent interests within the target shareholder base, with the attendant heterogeneous incentives to support deals, limits the monitoring capacity of institutional owners in negative premium deals.

Appraisal Risk and Corporate Disclosure During Mergers and Acquisitions

I exploit a 2007 court ruling that significantly strengthens appraisal rights for shareholders of Delaware-incorporated target firms to examine how managers respond to appraisal risk during takeovers. Appraisal rights give target shareholders the right to receive a judge’s determined value for their shares in lieu of the acquirer’s offer. Target-firm disclosures play a critical role in the valuation decisions of judges; and valuation decisions pose a substantial risk to acquirers. I find that heightened appraisal risk induces target managers to withhold positive news arriving between the announcement and effective completion of the takeover. This observation is driven by target managers who are aligned with acquirers. I further document that acquirers benefit from this behavior in the form of a lower likelihood of appraisal and a higher likelihood of positive post-acquisition returns. Overall, my findings suggest that acquirer-target manager ties play an important role in facilitating the dilution of target shareholder property rights.

Has the Strengthening of Appraisal Rights Led to an Increase in Takeover Premiums?

Two Delaware appraisal related developments occurred in the summer of 2007. These developments have made it easier for target shareholders to seek appraisal, thus strengthening Delaware appraisal rights. Recent studies have documented empirical patterns that associate stronger appraisal rights with higher overall takeover premiums for all appraisal eligible deals. Meanwhile, the finance literature has long discussed the competitive nature of the market for corporate control. If buyers have already been paying competitive prices, the deal prices are unlikely to experience an overall increase in response to stronger appraisal rights, which protect minority target shareholders when they are under-paid at sub-market rates in M&A transactions. In this paper, we revisit the empirical patterns documented by recent studies and find that, consistent with the finance literature, there is no evidence that the strengthening of appraisal rights has led to an overall increase in takeover premiums across all appraisal eligible deals.

Behavioral Aspects of Merger Decisions: The Effect of Average Purchase Price and Other Reference Prices

We develop a novel measure of target shareholders’ average purchase price (TAPP). In a sample of all U.S. public firm merger offers from 1990 to 2019, we find that: (1) the offer premium is positively correlated with the ratio of TAPP to the target’s pre-offer stock price; (2) TAPP dominates several other purchase-price estimators as an explanatory variable; (3) the TAPP effect is additive and about equal in its magnitude to that of the pre-offer 52-week-high price; (4) reference prices affect merger offers primarily through adjusting the offer premium; and (5) the reference-prices-induced increase in premium hurts acquirer shareholders. Our results portray TAPP as a promising shareholder purchase-price indicator.

Signaling Under Threat: Evidence of Voluntary Disclosure in Contested Takeovers

We investigate voluntary disclosure strategies in contested takeovers and the associated economic consequences. Using a difference-in-differences research design and propensity score matching, we find that, relative to friendly takeovers, target management in contested takeovers provides more earnings guidance and conveys more good news during the takeover. Moreover, voluntary disclosure helps contested targets negotiate a better offer, and the results are stronger for targets with more information asymmetry. Collectively, targets adopt voluntary disclosure and alter their strategies under the threat of contested takeover to enhance their bargaining power. Voluntary disclosure by contested targets serves as a negotiation tactic that potentially benefits target shareholders.