Document Type

Article

Publication Title

Journal of Corporate Finance

Publication Date

2012

ISSN

0749-5587

Page Number

1248

Keywords

M&A offers, announcement period return, deal completion, rates, takeover premium

Disciplines

Commercial Law | Law

Abstract

Using hand-collected data, we examine the targeting of shareholder class action lawsuits in merger & 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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