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

59 Pages Posted: 30 May 2019 Last revised: 4 Dec 2020

See all articles by Tingting Liu

Tingting Liu

Iowa State University

Micah S. Officer

Loyola Marymount University - Department of Finance

Date Written: October 1, 2019

Abstract

Using unique, hand-gathered data, this paper examines how earnings news about the target firm released publicly during the private merger negotiation process affects bidding strategies. We provide strong evidence that fundamental news about target firm earnings, and the public-market reaction to that news, has a substantial and significant impact on the initial private bids that acquirers make for their targets. This effect is stronger among auction deals and target-initiated deals, indicating that the nature of the sales process and potential information asymmetry affect how bidders react to earnings news. Finally, we find that bidders respond differently to fourth fiscal quarter earnings compared to non-fourth fiscal quarter earnings. Overall, our findings provide novel evidence suggesting that accounting earnings released during private negotiations play an important role in setting the deal price.

Keywords: Private merger negotiations; pre-bid runup; earnings releases; bidding strategies; early M&A events; takeover premiums

JEL Classification: G34, M41

Suggested Citation

Liu, Tingting and Officer, Micah S., Earnings news, stock-market reactions, and bidding behavior in private merger negotiations (October 1, 2019). Available at SSRN: https://ssrn.com/abstract=3383209 or http://dx.doi.org/10.2139/ssrn.3383209

Tingting Liu (Contact Author)

Iowa State University ( email )

2330 Gerdin Business Building
Ames, IA 50011
United States

Micah S. Officer

Loyola Marymount University - Department of Finance ( email )

Los Angeles, CA 90045
United States

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