Economic Consequences of Announcing Strategic Alternatives

How does a public announcement about a company exploring its potential sale or merger (“strategic alternatives”) affect the company and its shareholders? This study provides the first look at some of the positive and negative consequences to this unique disclosure of strategic alternatives. The inherent uncertainty in ex-post transactional outcomes—whether the firm is acquired, liquidated, or remains independent—allows me to estimate the disclosure's consequences on shareholder value which accrues differentially to these subsamples. I find that the announcement of strategic alternatives is associated with excess takeover-related gains for firms that are subsequently acquired but abnormal negative returns for firms that are not subsequently sold. Further results suggest a unique trade-off embodied by this disclosure: the announcement can generate greater investor attention and lead to a more informed M&A sale process (the benefit), while also being a costly admission of business problems that alienates stakeholders and wears on operations (the cost). These consequences that ultimately affect firm value underscore the cost-benefit trade-off managers should consider when making this disclosure decision