Firms use media coverage to influence merger negotiations

Apr 26, 2011

( -- Companies involved in merger talks manipulate their stock prices during negotiations by releasing more news than usual, according to a University of Michigan study.

"Media coverage has a significant effect on and returns," said Kenneth Ahern, assistant professor of finance at U-M's Ross School of Business. "Even stale news, if widely publicized, can dramatically raise short-term returns and influence prices of large and widely followed stocks in the S&P 500."

In their study, "Who Writes the News? Corporate Press Releases during Merger ," Ahern and Ross School colleague Denis Sosyura examined more than 500 completed stock mergers of large U.S. publicly traded firms from 2000 to 2008. They studied the frequency and content of news releases issued by acquiring firms, and analyzed more than 617,000 articles in 421 newspapers and newswires worldwide.

"We find that bidders in stock mergers originate substantially more news stories after the start of merger negotiations, but before the public announcement," said Sosyura, assistant professor of finance at the Ross School. "This strategy generates a short-lived run-up in bidders' stock prices precisely during the period when the stock-exchange ratio is determined, which leads to a lower takeover price."

The researchers provide strong evidence that firms manage their media through news releases precisely when they would benefit the most from a temporary price increase.

For fixed-exchange-ratio stock mergers (when the target and acquiring firm negotiate a fixed number of acquirer shares as payment for target stock), this occurs during the negotiation period from the time that talks first begin until before the public announcement of the merger. In contrast, in floating-exchange-ratio stock mergers (where the exchange ratio is determined at the close of the merger) there is no increase in firm-originated news during the negotiations.

Fixed-ratio acquirers issue nine extra news releases during the average negotiation period (about 64 days), a 10 percent increase compared to baseline averages, and have an increase of 2.3 more articles per day compared to floating-ratio acquirers, the study shows. Further, domestic news coverage is 50 percent higher and newswire coverage is 85 percent higher for fixed-ratio bidders during the negotiation period compared to the pre-negotiation period (the 120 trading days prior to the beginning of merger talks).

"The marked increase in has a significant and positive effect on stock returns consistent with the evidence that higher visibility induces short-term demand for a stock," Sosyura said. "Furthermore, consistent with active media management, we observe a drastic correction in the of fixed-ratio bidders after the merger announcement."

Over the three-day period around the merger announcement, an average fixed-ratio bidder loses about 4.1 percent in market value, compared to only 2.5 percent for floating-ratio acquirers, the researchers say. This downward trend continues over the following two months, with fixed-ratio bidders losing nearly 40 percent of the negotiation-period abnormal stock price run-up.

Ahern and Sosyura found that compared to floating-ratio bidders, fixed-ratio bidders issue significantly fewer negative news releases during the period when the exchange ratio is established. Also, newspapers are less likely to report on news releases issued by fixed-ratio acquirers during merger negotiations compared to floating-ratio acquirers.

"The evidence suggests that the changes in the number and tone of the acquirer-originated press releases reflect active media management rather than random arrival of good news," Ahern said. "In contrast to the view that the information contained in media reports increases the efficiency of a market, we show that the press can be strategically used by firms to advance their own interests.

"The strategic use of media by firms is likely to affect many corporate actions beyond mergers, such as executive compensation, stock issues and repurchases, proxy contests and product market competition."

Explore further: Online retailers have clear advantage by not collecting sales tax

add to favorites email to friend print save as pdf

Related Stories

Interest rate shock could kick-start stock exchange

Aug 04, 2009

Norges Bank surprised most experts by cutting the interest rate by as much as 1.75 percentage points during the final interest rate meeting in 2008. Surprise interest rate changes like this, so-called interest rate shocks, ...

Women on board: Does forced diversity hurt firm performance?

Feb 09, 2010

( -- New SEC rules will require public firms to disclose what role, if any, diversity plays in appointing members to their corporate boards, but University of Michigan researchers say any forced restructuring ...

Recommended for you

Not just the poor live hand-to-mouth

4 hours ago

When the economy hits the skids, government stimulus checks to the poor sometimes follow. Stimulus programs—such as those in 2001, 2008 and 2009—are designed to boost the economy quickly by getting cash ...

Which foods may cost you more due to Calif. drought

Apr 17, 2014

With California experiencing one of its worst droughts on record, grocery shoppers across the country can expect to see a short supply of certain fruits and vegetables in stores, and to pay higher prices ...

Performance measures for CEOs vary greatly, study finds

Apr 16, 2014

As companies file their annual proxy statements with the U.S. Securities and Exchange Commission (SEC) this spring, a new study by Rice University and Cornell University shows just how S&P 500 companies have ...

User comments : 0

More news stories

Not just the poor live hand-to-mouth

When the economy hits the skids, government stimulus checks to the poor sometimes follow. Stimulus programs—such as those in 2001, 2008 and 2009—are designed to boost the economy quickly by getting cash ...

Male-biased tweeting

Today women take an active part in public life. Without a doubt, they also converse with other women. In fact, they even talk to each other about other things besides men. As banal as it sounds, this is far ...

Archaeologists, tribe clash over Native remains

Archaeologists and Native Americans are clashing over Indian remains and artifacts that were excavated during a construction project in the San Francisco Bay Area, but then reburied at an undisclosed location.

Math modeling handbook now available

Math comes in handy for answering questions about a variety of topics, from calculating the cost-effectiveness of fuel sources and determining the best regions to build high-speed rail to predicting the spread ...