Appraisal Risk and Corporate Disclosure During Mergers and Acquisitions

Abstract

Appraisal risk is a rapidly emerging phenomenon that threatens efficiency in the takeover market. I exploit a 2007 court ruling that significantly strengthens appraisal rights for shareholders of Delaware-incorporated target firms to examine how managers respond to appraisal risk during takeovers. Appraisal rights give target shareholders the right to receive a judge’s determined value for their shares in lieu of the acquirer’s offer. Target-firm disclosures are pivotal in the valuation decisions of judges; and valuation decisions pose a substantial risk to acquirers. I find that heightened appraisal risk induces target managers to withhold positive news arriving between the announcement and effective completion of the takeover. This observation is driven by target managers who are aligned with acquirers. I further document that acquirers benefit from this disclosure strategy in the form of a 77% lower likelihood of appraisal. My study highlights the important role of strategic disclosure in the efficient reallocation of assets in the economy.

Keywords: Appraisal Laws, Shareholder Property Rights, Mergers and Acquisitions, Corporate Disclosure

JEL Classification: G32, K22, G34, M41