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Shareholder litigation in mergers and acquisitions

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  • Krishnan, C.N.V.
  • Masulis, Ronald W.
  • Thomas, Randall S.
  • Thompson, Robert B.

Abstract

Using hand-collected data, we examine the targeting of shareholder class action lawsuits in merger and acquisition (M&A) transactions, and the associations of these lawsuits with offer completion rates and takeover premia. We find that M&A offers subject to shareholder lawsuits are completed at a significantly lower rate than offers not subject to litigation, after controlling for selection bias, different judicial standards, major offer characteristics, M&A financial and legal advisor reputations as well as industry and year fixed effects. M&A offers subject to shareholder lawsuits have significantly higher takeover premia in completed deals, after controlling for the same factors. Economically, the expected rise in takeover premia more than offsets the fall in the probability of deal completion, resulting in a positive expected gain to target shareholders. However, in general, target stock price reactions to bid announcements do not appear to fully anticipate the positive expected gain from potential litigation. We find that during a merger wave characterized by friendly single-bidder offers, shareholder litigation substitutes for the presence of a rival bidder by policing low-ball bids and forcing offer price improvement by the bidder.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 18 (2012)
Issue (Month): 5 ()
Pages: 1248-1268

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Handle: RePEc:eee:corfin:v:18:y:2012:i:5:p:1248-1268

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Web page: http://www.elsevier.com/locate/jcorpfin

Related research

Keywords: M&A offers; Shareholder class action lawsuits; Announcement period return; Deal completion rate; Takeover premium; Price revision;

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References

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Cited by:
  1. Humphery-Jenner, Mark & Powell, Ronan, 2014. "Firm size, sovereign governance, and value creation: Evidence from the acquirer size effect," Journal of Corporate Finance, Elsevier, vol. 26(C), pages 57-77.

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