Target Firm Advertising and Firm Value

Abstract

Appendix is available at: https://ssrn.com/abstract=3304137

Consistent with hypotheses underlying firm advertising, we find that targets with pre-takeover advertising obtain higher premiums, while their acquirers earn lower announcement returns. These economically significant effects suggest that, through advertising, targets increase their profile and negotiating power. Further, targets that advertise are more likely to initiate their takeovers, attract multiple bidders, receive enhanced bids, capture more merger rents, and even in failed acquisitions, experience a 1% permanent revaluation. The latter result differentiates between information asymmetry and behavioral explanations for the target advertising. Overall, the results support the hypothesis that management advertises to transmit information to investors and potential acquirers.

Keywords: Advertising; Mergers and acquisitions; Information transmission, Behavioral bias

JEL Classification: D03; G02; G14; G34; M41