Why Do Firms Sell Out? Separating Targets’ Motives from Bidders’ Selection of Targets in M&A

Jenny Zha Giedt

MPRA Paper from University Library of Munich, Germany

Abstract: 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.

Keywords: strategic alternatives; mergers and acquisitions; target motives; takeover prediction; financial constraints; deal initiation; voluntary disclosure; media leaks (search for similar items in EconPapers)
JEL-codes: D84 G3 G34 M2 M21 (search for similar items in EconPapers)
Date: 2017-08-23, Revised 2017-08-23
New Economics Papers: this item is included in nep-cfn and nep-com
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