The Effect of Merger Anticipation on Bidder and Target Firm Announcement Period Returns
38 Pages Posted: 10 Nov 2008 Last revised: 25 Feb 2011
Date Written: October 1, 2010
This paper investigates the extent to which investors anticipate bidder and target merger candidacy and if investor anticipations about candidacy affect the distribution of value between bidder and target firm shareholders. We find that investors can predict bidder firms more successfully than target firms. To investigate how value is distributed among bidder and target shareholders, we control for different degrees of predictability in bidder and target selection. Once we account for greater predictability in bidder firm candidacy, the difference between bidder and target firm seven-day cumulative abnormal returns around a merger announcement decreases significantly. Thus, the evidence supports the hypothesis that to some extent the asymmetry in investor anticipations of merger parties causes disparity in bidder and target firm announcement period abnormal returns.
Keywords: merger, endogeneity, anticipation
JEL Classification: G34
Suggested Citation: Suggested Citation