Economic Consequences of Announcing Strategic Alternatives
71 Pages Posted: 4 May 2021
Date Written: April 27, 2021
What are the costs and benefits to a company of publicly announcing it is seeking a potential sale or merger (“strategic alternatives”), and how does the announcement affect long-run shareholder value? The announcement of strategic alternatives is disruptive, generating +5.4% three-day returns on average, and involves a unique cost-benefit tradeoff unlike any other voluntary disclosure. I find that the announcement leads to increased attention from investors and bidders and a more probable and robust M&A sale process (i.e., the benefits of improved transparency). However, I also find that the announcement is a costly public admission of business problems that wears on operations and alienates stakeholders such as customers and employees (i.e., the costs for disclosure to be credible). In addition, I document that the disclosure’s costs and benefits are impounded into long-run stock returns as two countervailing effects, where the net effect of disclosure on firm value depends on whether the company is subsequently acquired. Overall, these results are important because they provide 1) evidence of various channels between a disclosure choice and shareholder value; 2) separate, offsetting estimates of the disclosure’s costs and benefits affecting firm value; and 3) key considerations to investors and company decision makers who would face the consequences of this disclosure decision.
Keywords: corporate disclosure; strategic alternatives; mergers and acquisitions; disclosure costs; disclosure benefits; information transmission; shareholder value
JEL Classification: D82, D84, G14, G34, M41
Suggested Citation: Suggested Citation