Information Environment and Gains from Corporate Takeovers

Abstract

Motivated by the inadequate research in understanding the determinants of takeover wealth creation, as well as the theoretical and practical importance of information environment in the takeover market, this thesis examines the wealth effects of information environment on UK takeovers. It regards information dissemination as a process inherent in takeover announcements, along which, factors capturing the characteristics of information sender, information content, information recipient and market condition, are addressed to form three key research issues.

First considered are the wealth effects of misvaluation conditional on information signalled by payment and financing methods of takeovers. The results indicate that a price run-up via an upward revaluation follows undervalued bidders releasing good news (non-equity financed cash deals). Secondly, this research is concerned with the wealth effects of investor sentiment, towards the information released, at a whole market and individual firm level. The results show that high investor sentiment drives up target firms’ announcement returns and further causes an increase in takeover premium. The last issue addressed is the relation between information asymmetry and gains to frequent bidders. The results suggest that information asymmetry declines in a merger series while serial non-equity financed cash deals generate decreasing bidders’ announcement returns since the scale of their upward revaluations continually decreases with subsequent announcements. These three groups of results form a mechanism of information environment’s wealth effect as follows. Takeover announcements release new information. With the arrival of new information investors update their assessments of firm value. The scale of revaluation is determined by a firm’s information asymmetry, the direction of it depends on firm misvaluation, information signalled by takeover announcements and the investor sentiment in interpreting this information.