Anticipating Takeovers and their Payment Methods : A New Approach Using U.S. Acquisitions

This paper introduces a new approach for identifying the ex-ante dates on which the market anticipates both takeovers and their payment forms. This approach predicts when the market receives informative signals about potential takeovers, the variance-covariance of the stock returns shifts. Using a sample of U.S. acquisitions, I find that 86% of takeovers (62% of payment forms) are anticipated on average nine (six) months in advance. This is much earlier than reported by previous studies (two months). Moreover, this paper documents that employing the anticipation dates can improve the identification of takeover studies. Previous findings report that the return correlation (as a proxy of the relatedness) of merging firms is one of the important cross-sectional determinants of the choice between cash and equity payments. However, it loses its explanatory power when I control for the anticipation effects. The evidence indicates that the likelihood of a takeover being anticipated is related to the firm characteristics, so the anticipation variables should be included in the choice-of-payment-method regressions. The return correlation and other price-related variables should also be estimated from the pre-deal-anticipation period to prevent them from being contaminated by the anticipation effects