IDEAS home Printed from https://ideas.repec.org/a/bla/jbfnac/v49y2022i7-8p1264-1288.html
   My bibliography  Save this article

The impact of takeover anticipation on rival firms

Author

Listed:
  • Frederick Davis
  • Svetlana Davis
  • Xiaoyang Sha
  • Thomas Walker

Abstract

This paper utilizes a large, hand‐collected dataset to observe for the first time the initial wealth impact of an anticipated takeover bid on the target's rival. Distinguishing among predominant theories of acquisition probability, collusion, competitive advantage, hubris and industry growth, we find substantial evidence to support the premise that gains to rivals around the target firm's rumor date are associated with becoming either a target or a bidding firm within 1 year. Additionally, factors at the time of bid anticipation serve as useful predictors when assessing which rivals will receive or initiate a bid for corporate control. Our results demonstrate that takeover rumors represent an early and important mechanism by which information is transferred throughout an industry.

Suggested Citation

  • Frederick Davis & Svetlana Davis & Xiaoyang Sha & Thomas Walker, 2022. "The impact of takeover anticipation on rival firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(7-8), pages 1264-1288, July.
    • Handle: RePEc:bla:jbfnac:v:49:y:2022:i:7-8:p:1264-1288
    DOI: 10.1111/jbfa.12577
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/jbfa.12577
    Download Restriction: no
    File URL: https://libkey.io/10.1111/jbfa.12577?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Jensen, Michael C. & Ruback, Richard S., 1983. "The market for corporate control : The scientific evidence," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 5-50, April.
    2. Kewei Hou, 2007. "Industry Information Diffusion and the Lead-lag Effect in Stock Returns," Review of Financial Studies, Society for Financial Studies, vol. 20(4), pages 1113-1138.
    3. Jean Tirole, 1988. "The Theory of Industrial Organization," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262200716, December.
    4. Roll, Richard, 1986. "The Hubris Hypothesis of Corporate Takeovers," The Journal of Business, University of Chicago Press, vol. 59(2), pages 197-216, April.
    5. Bradley, Michael & Desai, Anand & Kim, E. Han, 1988. "Synergistic gains from corporate acquisitions and their division between the stockholders of target and acquiring firms," Journal of Financial Economics, Elsevier, vol. 21(1), pages 3-40, May.
    6. Gao, Ning & Peng, Ni & Strong, Norman, 2017. "What determines horizontal merger antitrust case selection?," Journal of Corporate Finance, Elsevier, vol. 46(C), pages 51-76.
    7. Betton, Sandra & Davis, Frederick & Walker, Thomas, 2018. "Rumor rationales: The impact of message justification on article credibility," International Review of Financial Analysis, Elsevier, vol. 58(C), pages 271-287.
    8. Jalal D. Akhavein & Allen N. Berger & David B. Humphrey, "undated". "The Effects of Megamergers on Efficiency and Prices: Evidence from a Bank Profit Function," Finance and Economics Discussion Series 1997-09, Board of Governors of the Federal Reserve System (U.S.), revised 10 Dec 2019.
    9. Robin A. Prager & Timothy H. Hannan, 1998. "Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence From The Banking Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 433-452, December.
    10. Keown, Arthur J & Pinkerton, John M, 1981. "Merger Announcements and Insider Trading Activity: An Empirical Investigation," Journal of Finance, American Finance Association, vol. 36(4), pages 855-869, September.
    11. Sayan Chatterjee, 1986. "Types of synergy and economic value: The impact of acquisitions on merging and rival firms," Strategic Management Journal, Wiley Blackwell, vol. 7(2), pages 119-139, March.
    12. Hainmueller, Jens, 2012. "Entropy Balancing for Causal Effects: A Multivariate Reweighting Method to Produce Balanced Samples in Observational Studies," Political Analysis, Cambridge University Press, vol. 20(1), pages 25-46, January.
    13. Chou, Hsin-I & Tian, Gloria Y. & Yin, Xiangkang, 2015. "Takeover rumors: Returns and pricing of rumored targets," International Review of Financial Analysis, Elsevier, vol. 41(C), pages 13-27.
    14. Hertzel, Michael G, 1991. "The Effects of Stock Repurchases on Rival Firms," Journal of Finance, American Finance Association, vol. 46(2), pages 707-716, June.
    15. Kim, E Han & Singal, Vijay, 1993. "Mergers and Market Power: Evidence from the Airline Industry," American Economic Review, American Economic Association, vol. 83(3), pages 549-569, June.
    16. Joseph A. Clougherty & Tomaso Duso, 2009. "The Impact of Horizontal Mergers on Rivals: Gains to Being Left Outside a Merger," Journal of Management Studies, Wiley Blackwell, vol. 46(8), pages 1365-1395, December.
    17. Bhattacharyya, Sugato & Nain, Amrita, 2011. "Horizontal acquisitions and buying power: A product market analysis," Journal of Financial Economics, Elsevier, vol. 99(1), pages 97-115, January.
    18. Kenneth R. Ahern & Denis Sosyura, 2015. "Rumor Has It: Sensationalism in Financial Media," Review of Financial Studies, Society for Financial Studies, vol. 28(7), pages 2050-2093.
    19. Eckbo, B Espen, 1985. "Mergers and the Market Concentration Doctrine: Evidence from the Capital Market," The Journal of Business, University of Chicago Press, vol. 58(3), pages 325-349, July.
    20. Eckbo, B. Espen, 1983. "Horizontal mergers, collusion, and stockholder wealth," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 241-273, April.
    21. Stillman, Robert, 1983. "Examining antitrust policy towards horizontal mergers," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 225-240, April.
    22. Gerard Hoberg & Gordon Phillips, 2010. "Product Market Synergies and Competition in Mergers and Acquisitions: A Text-Based Analysis," Review of Financial Studies, Society for Financial Studies, vol. 23(10), pages 3773-3811, October.
    23. Jie Cai & Moon H. Song & Ralph A. Walkling, 2011. "Anticipation, Acquisitions, and Bidder Returns: Industry Shocks and the Transfer of Information across Rivals," Review of Financial Studies, Society for Financial Studies, vol. 24(7), pages 2242-2285.
    24. Davis, Frederick & Khadivar, Hamed & Walker, Thomas J., 2021. "Institutional trading in firms rumored to be takeover targets," Journal of Corporate Finance, Elsevier, vol. 66(C).
    25. Akhigbe, Aigbe & Martin, Anna D. & Whyte, Ann Marie, 2007. "Partial acquisitions, the acquisition probability hypothesis, and the abnormal returns to partial targets," Journal of Banking & Finance, Elsevier, vol. 31(10), pages 3080-3101, October.
    26. Chun-Da Chen & Ali M. Kutan, 2016. "Information Transmission Through Rumors in Stock Markets: A New Evidence," Journal of Behavioral Finance, Taylor & Francis Journals, vol. 17(4), pages 365-381, October.
    27. Gerard Hoberg & Gordon Phillips & Nagpurnanand Prabhala, 2014. "Product Market Threats, Payouts, and Financial Flexibility," Journal of Finance, American Finance Association, vol. 69(1), pages 293-324, February.
    28. Edward I. Altman, 1968. "Financial Ratios, Discriminant Analysis And The Prediction Of Corporate Bankruptcy," Journal of Finance, American Finance Association, vol. 23(4), pages 589-609, September.
    29. Xu, Yan & Xu, Nianhang & Chan, Kam C. & Li, Zhe, 2021. "Generalists vs. specialists: Who are better acquirers?," Journal of Corporate Finance, Elsevier, vol. 67(C).
    30. Cornett, Marcia Millon & McNutt, Jamie John & Strahan, Philip E. & Tehranian, Hassan, 2011. "Liquidity risk management and credit supply in the financial crisis," Journal of Financial Economics, Elsevier, vol. 101(2), pages 297-312, August.
    31. Patrick Augustin & Menachem Brenner & Marti G. Subrahmanyam, 2019. "Informed Options Trading Prior to Takeover Announcements: Insider Trading?," Management Science, INFORMS, vol. 65(12), pages 5697-5720, December.
    32. Kathleen Weiss Hanley & Gerard Hoberg, 2019. "Dynamic Interpretation of Emerging Risks in the Financial Sector," Review of Financial Studies, Society for Financial Studies, vol. 32(12), pages 4543-4603.
    33. Becher, David A. & Mulherin, J. Harold & Walkling, Ralph A., 2012. "Sources of Gains in Corporate Mergers: Refined Tests from a Neglected Industry," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(1), pages 57-89, February.
    34. Michael Gort, 1969. "An Economic Disturbance Theory of Mergers," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 83(4), pages 624-642.
    35. Edward I. Altman, 1968. "The Prediction Of Corporate Bankruptcy: A Discriminant Analysis," Journal of Finance, American Finance Association, vol. 23(1), pages 193-194, March.
    36. Gregor Andrade & Mark Mitchell & Erik Stafford, 2001. "New Evidence and Perspectives on Mergers," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 103-120, Spring.
    37. Masulis, Ronald W. & Simsir, Serif Aziz, 2018. "Deal Initiation in Mergers and Acquisitions," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 53(6), pages 2389-2430, December.
    38. Drobetz, W. & Momtaz, Paul P., 2020. "Antitakeover Provisions and Firm Value: New Evidence from the M&A Market," Journal of Corporate Finance, Elsevier, vol. 62(C).
    39. Tuan Ho & Ruby Brownen‐Trinh & Fangming Xu, 2021. "The information content of target price forecasts: Evidence from mergers and acquisitions," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(5-6), pages 1134-1171, May.
    40. Tunyi, Abongeh A., 2021. "Revisiting acquirer returns: Evidence from unanticipated deals," Journal of Corporate Finance, Elsevier, vol. 66(C).
    41. Palepu, Krishna G., 1986. "Predicting takeover targets : A methodological and empirical analysis," Journal of Accounting and Economics, Elsevier, vol. 8(1), pages 3-35, March.
    42. Borenstein, Severin, 1990. "Airline Mergers, Airport Dominance, and Market Power," American Economic Review, American Economic Association, vol. 80(2), pages 400-404, May.
    43. Eckbo, B Espen, 1992. "Mergers and the Value of Antitrust Deterrence," Journal of Finance, American Finance Association, vol. 47(3), pages 1005-1029, July.
    44. Barbopoulos, Leonidas G. & Adra, Samer & Saunders, Anthony, 2020. "Macroeconomic news and acquirer returns in M&As: The impact of investor alertness," Journal of Corporate Finance, Elsevier, vol. 64(C).
    45. Barton, David M & Sherman, Roger, 1984. "The Price and Profit Effects of Horizontal Merger: A Case Study," Journal of Industrial Economics, Wiley Blackwell, vol. 33(2), pages 165-177, December.
    46. Beau Grant Barnes & Nancy L. Harp & Derek Oler, 2014. "Evaluating the SDC Mergers and Acquisitions Database," The Financial Review, Eastern Finance Association, vol. 49(4), pages 793-822, November.
    47. Prager, Robin A & Hannan, Timothy H, 1998. "Do Substantial Horizontal Mergers Generate Significant Price Effects? Evidence from the Banking Industry," Journal of Industrial Economics, Wiley Blackwell, vol. 46(4), pages 433-452, December.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Gao, Ning & Peng, Ni & Zhang, Yi, 2021. "Distributive inefficiency in horizontal mergers: Evidence from wealth transfers between merging firms and their customers," International Review of Financial Analysis, Elsevier, vol. 78(C).
    2. Betton, Sandra & Davis, Frederick & Walker, Thomas, 2018. "Rumor rationales: The impact of message justification on article credibility," International Review of Financial Analysis, Elsevier, vol. 58(C), pages 271-287.
    3. Hammoudeh, Mosab & Nain, Amrita & Qian, Yiming, 2022. "The role of divestitures in horizontal mergers11We thank Jon Garfinkel, Jayant Kale, Kai Li, Gordon Philips, Anand Vijh, Thomas Wollmann, David Ravenscraft and participants at the 2016 American Financ," Journal of Corporate Finance, Elsevier, vol. 72(C).
    4. Amrita Nain & Yan Wang, 2018. "The Product Market Impact of Minority Stake Acquisitions," Management Science, INFORMS, vol. 64(2), pages 825-844, February.
    5. Song, Moon H. & Walkling, Ralph A., 2005. "Anticipation, Acquisitions and Bidder Returns," Working Paper Series 2005-11, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    6. Okoeguale, Kevin I. & Loveland, Robert, 2017. "Telecommunications deregulation and the motives for mergers," Journal of Economics and Business, Elsevier, vol. 94(C), pages 15-31.
    7. Bhattacharyya, Sugato & Nain, Amrita, 2011. "Horizontal acquisitions and buying power: A product market analysis," Journal of Financial Economics, Elsevier, vol. 99(1), pages 97-115, January.
    8. Dodonova, Anna, 2013. "Preemptive bidding in takeover auctions with externality," Journal of Economics and Business, Elsevier, vol. 69(C), pages 35-44.
    9. Joseph A. Clougherty & Tomaso Duso, 2009. "The Impact of Horizontal Mergers on Rivals: Gains to Being Left Outside a Merger," Journal of Management Studies, Wiley Blackwell, vol. 46(8), pages 1365-1395, December.
    10. Oh, Frederick Dongchuhl & Shin, Sean Seunghun, 2020. "Does product market competition affect corporate governance? Evidence from corporate takeovers," Journal of Empirical Finance, Elsevier, vol. 59(C), pages 68-87.
    11. Tunyi, Abongeh A., 2021. "Revisiting acquirer returns: Evidence from unanticipated deals," Journal of Corporate Finance, Elsevier, vol. 66(C).
    12. Ronan Powell & Sarah Prendergast & Ruchira Sharma, 2022. "The impact of economic nationalism in Europe on the returns to rivals of cross‐border M&A bids," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(9-10), pages 1784-1829, October.
    13. Kamerbeek, S.P., 2009. "Merger Performance and Efficiencies in Horizontal Merger Policy in the US and the EU," MPRA Paper 18064, University Library of Munich, Germany.
    14. Hu, Xiaoxue & Li, Dongxu, 2022. "Do horizontal mergers affect rivals’ cash holdings?," International Review of Economics & Finance, Elsevier, vol. 82(C), pages 275-298.
    15. Martynova, M. & Renneboog, L.D.R., 2005. "Takeover Waves : Triggers, Performance and Motives," Discussion Paper 2005-029, Tilburg University, Tilburg Law and Economic Center.
    16. Shahrur, Husayn, 2005. "Industry structure and horizontal takeovers: Analysis of wealth effects on rivals, suppliers, and corporate customers," Journal of Financial Economics, Elsevier, vol. 76(1), pages 61-98, April.
    17. Antón, Miguel & Azar, José & Gine, Mireia & Lin, Luca X., 2022. "Beyond the target: M&A decisions and rival ownership," Journal of Financial Economics, Elsevier, vol. 144(1), pages 44-66.
    18. Bhagat, Sanjai & Dong, Ming & Hirshleifer, David & Noah, Robert, 2005. "Do tender offers create value? New methods and evidence," Journal of Financial Economics, Elsevier, vol. 76(1), pages 3-60, April.
    19. Martynova, Marina & Renneboog, Luc, 2008. "A century of corporate takeovers: What have we learned and where do we stand?," Journal of Banking & Finance, Elsevier, vol. 32(10), pages 2148-2177, October.
    20. Sven‐Olof Fridolfsson & Johan Stennek, 2010. "Industry Concentration and Welfare: On the Use of Stock Market Evidence from Horizontal Mergers," Economica, London School of Economics and Political Science, vol. 77(308), pages 734-750, October.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:jbfnac:v:49:y:2022:i:7-8:p:1264-1288. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: http://www.blackwellpublishing.com/journal.asp?ref=0306-686X .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.