Why Are Firms Sold? Disentangling Target Motives and Bidders' Selection of Targets in M&A

Abstract

Using a unique sample of firms that volitionally seek a sale or merger, I document that self-selected potential target firms have recent poor performance and high leverage. Furthermore, corporate governance features, namely the presence of blockholders and golden parachutes, appear to incentivize the firms to seek a transaction. Subsequently, the subset of firms that receive bids have relatively better growth prospects and performance and lower market risk. The insights from separately modeling this two-step selection process are not obtained when predicting takeover targets using a one-step model.

Keywords: strategic alternatives, mergers and acquisitions, takeover targets, target motives JEL classification: G34

JEL Classification: D84, G34