Long run abnormal returns to acquiring firms: the form of payment hypothesis, bidder hostility and timing behavior

Abstract

In this paper, we set out to investigate the anomaly of previously-recorded poor post-bid performance of acquirers. In particular, we investigate the form of payments hypothesis, the form of bid hypothesis (hostile versus agreed) and the behavioral timing hypothesis, using a UK sample. In the US, the majority of tender offers, often taken as an indicator of bid hostility, are cash financed, making the disaggregation of hypotheses on the effects of form of financing and bidder hostility problematic. Using the UK as a “natural experiment” that allows examination of the effect of the form of payment separately from bidder hostility in a way not easily achievable in the US, we show that the form of payment hypothesis interacts with bid hostility, or “disciplinary bidding”, in explaining acquirer wealth effects. In line with previous research, we find support for the form of payment hypothesis (Aggrawal and Jaffe, 2000), but also show the combination of form of the bid and form of payment is a critical factor in determining post bid returns. Last, we show that both the form of payment chosen and the likelihood of a hostile bid are contingent upon macro-economic variables. This finding in consistent with the Loughran and Ritter (2000) “behavioral timing” hypothesis and has implications for the use of calendar time returns in long-run performance studies. In contrast to the findings of Mitchell and Stafford (2000) we also find evidence that calendar time performance measures are significantly worse during “hot” periods.