The Source of Gains to Targets and Their Industry Rivals: Evidence Based on Terminated Merger Proposals

Abstract

We examine merger gains to targets and their industry rivals and find evidence consistent with the signaling hypothesis. We find that targets and rivals benefit from the merger announcement, but termination results in significant negative returns for targets and significant positive returns for rivals. Termination gains to rivals support the hypothesis that rival firms could become acquisition targets. The gains are positively related to subsequent acquisition activity involving the target and the extent of merger activity in the industry, and are inversely related to the relative size of the target rivals, the presence of competing bidders, and the regulatory environment.