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

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