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The Effects of the Method of Payment and the Type of Offer on Target Returns in Mergers and Tender Offers
Author(s) -
Suk David Y.,
Sung Hyun Mo
Publication year - 1997
Publication title -
financial review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.621
H-Index - 47
eISSN - 1540-6288
pISSN - 0732-8516
DOI - 10.1111/j.1540-6288.1997.tb00440.x
Subject(s) - tender offer , payment , cash , shareholder , mergers and acquisitions , business , monetary economics , stock (firearms) , economics , significant difference , financial economics , finance , corporate governance , mechanical engineering , statistics , mathematics , engineering
This paper re‐examines the effects of the method of payment and type of offer on target abnormal returns around the takeover announcement, controlling for the target firm's institutional ownership. Previous studies suggest the difference in announcement‐period target returns between cash offers and stock exchange offers can be explained by the difference in capital gains tax liabilities of the target shareholders and/or the difference in the information effect of the method of payment. The empirical results indicate no relation between bid premiums (or target abnormal returns) and institutional ownership of the target firm in cash offers and a systematic difference in target returns between mergers and tender offers even after controlling for the method of payment. These results are inconsistent with both the tax hypothesis and the information effect hypothesis. The evidence suggests the likelihood of future competition might be higher in tender offers than in mergers.