Private Information in M&A Transactions: Evidence from Withdrawn Deals

Abstract

Based on a large sample of withdrawn mergers over a time period from 1979 until 2003, we examine the informational content revealed to the market by a merger attempt. Using event study methodology, we find that firms that receive a cash offer have a significantly positive price reaction that persists even after the withdrawal of the merger. In contrast, firms that are targets of a stock-financed takeover attempt lose all the abnormal positive return they received at the announcement of the merger once the merger is withdrawn. After controlling for several potential explanations, we find that the financing choice of the bidder significantly affects the overall stock return to the target over the period from announcement to withdrawal. Our findings are consistent with an asymmetric information model, where the bidder has private information about the target that is revealed to the market through the financing choice.

This paper is subsumed by the paper: "Target Revaluation after Failed Takeover Attempts Cash versus Stock" joint with Ulrike Malmendier and Farzad Saidi. See http://ssrn.com/abstract=1785942.

Keywords: Mergers and Acquisitions, Private Information, Medium of Exchange

JEL Classification: G14, G34, D03, D82