Three Essays on Signalling and Price Dynamics in Mergers and Acquisitions
Davis, Frederick James
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In this dissertation, I investigate three different issues related to signalling and price dynamics in mergers and acquisitions. The first issue is whether the act of raising capital signals an increase in takeover probability for a forthcoming target. Analysing target returns under event-study methodology, I find that this is indeed the case, as was initially pre-supposed by financial journalists. The second issue is whether the observed increase in target returns which are associated with the increase in takeover probability can be attributed to the actions of sophisticated traders, either via information leakage or through the adept analysis of publicly available information. An examination of price-volume dynamics reveals that investors incorporate the increased likelihood of a takeover attempt into target firm returns without necessarily resorting to illegal insider trading. The final issue is whether this public signal of raising capital impacts the target price runup and takeover premium in a meaningful way. Multivariate regression analysis reveals substantial support that raising capital close in proximity to the acquisition announcement date is associated with significant increases in both target firm returns as well as takeover premiums paid by acquiring firms. In sum, these three essays provide evidence which supports the notion that raising capital can act as both a statistically and economically significant signal to all market participants of a forthcoming takeover attempt.