Public news, stock-market reactions, and bidding behavior in private merger negotiations

Abstract

Using unique, hand-gathered data, this paper examines how public news about the target firm
released publicly during the private merger negotiation process affects bidding strategies. We
provide strong evidence that market reactions to information events during the private sale process
have a substantial impact on takeover prices. However, the sensitivity of private bids to target-firm
public market returns varies significantly depending on the source of the news. Moreover, bidders
are more sensitive to news releases in their first private bids and have lower sensitivity to news
released when they make bid revisions after the initial private bid submission. In general, bid
responses to positive news are stronger than bid responses to negative news. Overall, our findings
provide novel evidence suggesting that the market reactions to the release of information during
merger negotiations have important implications for takeover costs.

Keywords: Private merger negotiations; market reactions to public news releases; bidding strategies; target initiation; takeover premiums

JEL Classification: G34, M41