Economic Consequences of Announcing Strategic Alternatives
56 Pages Posted: 26 Nov 2015 Last revised: 15 Dec 2018
Date Written: December 1, 2018
Companies’ announcements of strategic alternatives generate 5 to 6 percent three-day stock returns, yet little is known about the consequences of this event. This study documents the costs and benefits of voluntary disclosure in a setting where the company reveals its decision to explore a potential sale or merger. The inherent uncertainty in ex-post transactional outcomes (whether the firm is acquired, liquidated, or remains independent) allows identification of disclosure consequences differentially accruing to these subsamples. The announcement of strategic alternatives is associated with excess takeover-related gains for firms that are subsequently acquired but abnormal negative returns for firms that are not subsequently sold. Tests of potential mechanisms are consistent with the announcement generating greater investor attention and leading to a more informed M&A sale process, while also being a costly admission of business problems that alienates stakeholders and wears on operations. These consequences ultimately affect firm value and underscore the cost-benefit analysis managers should consider when making this disruptive disclosure decision.
Keywords: corporate disclosure; strategic alternatives; mergers and acquisitions; economic consequences; disclosure costs; disclosure benefits; information transmission; shareholder value
JEL Classification: D82, D84, G14, G34, M41
Suggested Citation: Suggested Citation