In this paper I examine the effects of overpayment and form of financing on bidding firms' stock returns and the determinants of the form of financing in mergers and tender offers. First, I find that in the 1980s potential overpayments to target shareholders and the form of financing are important for explaining cross‐sectional differences in bidding firms' returns upon the announcement of mergers or tender offers. Second, I find that in the 1980s cash offers were likely to be chosen by cash‐rich firms relative to their industry, and stock exchange offers were likely to be chosen by normal cash‐generating firms relative to their industry. The latter finding is consistent with the pecking order hypothesis and casts doubt on recent signaling explanations of the form of financing.
Empirically, bidder returns at the time of takeover announcements are negative. This paper investigates the relation between bidder returns and overpayment in mergers and tender offers while controlling for other potentially important factors. Unlike other studies, the paper measures overpayment using two valuation ratios: earnings-price ratio and book-to-market ratio. Results show these ratios are important in explaining negative bidder returns. The paper also finds that the payment method in mergers and tender offers produces an information effect.
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 a h r 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.
In this paper we test the joint implications for the intertemporal behavior of stock prices and dividends expressed in the Lintner dividend model and the present value model of stock prices. We use macro data corresponding to quarterly S&P 500 index prices and dividends for January 193O-December 1990. The methodology used is the error correction model (ECM), which allows testing for long-term and short-term relations between the two variables. Results from the ECM indicate that a long-term equilibrium relation exists between dividends and stock prices, and that an error correction mechanism is at work when a disequilibrium exits between the two variables. Stock prices and dividends also influence each other in the short term. Finally, the results show that dividends and stock prices exhibit a contemporaneous causal relation.
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