Public news, stock-market reactions, and bidding behavior in private merger negotiations

Using unique, hand-gathered data, this paper examines how public news about the target firmreleased publicly during the private merger negotiation process affects bidding strategies. Weprovide strong evidence that market reactions to information events during the private sale processhave a substantial impact on takeover prices. However, the sensitivity of private bids to target-firmpublic market returns varies significantly depending on the source of the news. Moreover, biddersare more sensitive to news releases in their first private bids and have lower sensitivity to newsreleased when they make bid revisions after the initial private bid submission. In general, bidresponses to positive news are stronger than bid responses to negative news. Overall, our findingsprovide novel evidence suggesting that the market reactions to the release of information duringmerger negotiations have important implications for takeover costs