5 research outputs found
Economic Consequences of Announcing Strategic Alternatives
This paper documents the consequences of publicly announcing “strategic alternatives,” whereby the company reveals its decision to explore a potential sale or merger. The inherent uncertainty in ex-post transactional outcomes (i.e., whether the firm is sold, liquidated, or remains independent) allows me to identify positive and negative consequences differentially accruing to these subsamples. The public announcement of strategic alternatives is associated with excess takeover-related gains for firms that are subsequently acquired but abnormally negative returns for firms that are not subsequently sold. Tests of potential mechanisms are consistent with the public announcement generating greater investor attention and leading to a more informed M&A sale process that maximizes value for successful targets’ shareholders, while also being a costly admission of business problems that alienates company stakeholders and wears on operations. These consequences that are ultimately related to firm value underscore the varied costs and benefits managers should weigh when making this disruptive disclosure decision
Economic Consequences of Announcing Strategic Alternatives: A Voluntary Disclosure's Benefits and Costs
This study examines the benefits and costs to a company of publicly announcing that it is seeking a potential sale or merger. I find that the announcement leads to increased market attention and a more robust M&A sales process—the benefits of improved transparency. However, I also find evidence of the announcement alienating stakeholders and increasing business disruption—the costs of credible disclosure. I document the countervailing valuation effects of these benefits and costs, where the net valuation effect depends on whether the company is subsequently acquired. This research is important because it (i) demonstrates the disclosure’s impact on the company through multiple channels, (ii) estimates the valuation effects, and (iii) identifies key considerations for investors and other stakeholders who bear the consequences of such a disclosure
Why Do Firms Sell Out? Separating Targets’ Motives from Bidders’ Selection of Targets in M&A
This paper explores why firms seek strategic alternatives, effectively putting themselves up for sale in the market for corporate control. Using a sample of firms that are observed to be exploring strategic alternatives, I model (1) the self-selection of firms to become potential takeover targets, which is distinct from (2) the selection of targets by bidders. The findings suggest that firms seek strategic alternatives because they are performing poorly and face financial constraints, yet corporate governance mechanisms prompt the disruptive attempt to maximize shareholder value. In contrast, the subset of firms that actually receive bids have relatively better growth prospects and performance, and lower market risk – which suggests that bidders do not prefer under-performing targets, contrary to conventional thought. The largely contrasting profiles of firms that are volitionally supplied by sellers versus demanded by bidders modify our conventional understanding of target firms’ motives and target selection in M&A
Economic Consequences of Announcing Strategic Alternatives
This paper documents the consequences of publicly announcing “strategic alternatives,” whereby the company reveals its decision to explore a potential sale or merger. The inherent uncertainty in ex-post transactional outcomes (i.e., whether the firm is sold, liquidated, or remains independent) allows me to identify positive and negative consequences differentially accruing to these subsamples. The public announcement of strategic alternatives is associated with excess takeover-related gains for firms that are subsequently acquired but abnormally negative returns for firms that are not subsequently sold. Tests of potential mechanisms are consistent with the public announcement generating greater investor attention and leading to a more informed M&A sale process that maximizes value for successful targets’ shareholders, while also being a costly admission of business problems that alienates company stakeholders and wears on operations. These consequences that are ultimately related to firm value underscore the varied costs and benefits managers should weigh when making this disruptive disclosure decision
Construct validity in accruals quality research
A large body of empirical research in accounting investigates the causes and consequences of accruals quality, reaching numerous influential conclusions. Yet little work has been done to systematically evaluate the validity of the underlying measures of accruals quality. We evaluate these measures using three criteria: (i) Is the measure unaffected by the underlying economic determinants of accruals? (ii) Does the measure consistently reflect errors in accruals? and (iii) Does the measure facilitate tests with sufficient power to detect plausible variation in accrual errors? Using a combination of theoretical modelling and numerical simulations, we show that all measures fail at least one of these criteria. Our evaluation provides new interpretations of existing research and guides the choice of measures and the interpretation of results in future research