Journal of Financial Economics 19 (1987) 329-349.

North-Holland

TARGET ABNORMAL RETURNS ASSOCIATED WITH

ACQUISITION ANNOUNCEMENTS
Payment, Acquisition Form, and Managerial Resistance*

Yen-Sheng HUANG
,Vo~~onal
Taiwan Instrtute, Taipei, Taiwan, R.O.C.

Ralph A. WALKLING
Ohio State Linirersity, Columbus, OH 43210. USA

Received April 1985, final version received May 1987

Abnormal returns earned by target firms at the time of initial acquisition announcements are
related to form of payment, degree of resistance, and type of offer. Results indicate that
interdependence among these characteristics is important. Previous research suggests that tender-
offer targets earn higher abnormal returns than merger targets. After controlling for payment
method and degree of resistance, however, the difference in abnormal returns between tender
offers and mergers is insignificant. Resisted offers are associated with insignificantly higher returns
than unresisted offers. Abnormal returns associated with cash offers are significantly higher than
those associated with stock offers.

1. Introduction
This research tests three hypotheses about target-firm announcement-period
returns. These hypotheses are that abnormal returns will be higher (1) in
tender offers than in mergers, (2) in cash ofI’ers than in stock offers, and (3) in
resisted offers than in unresisted offers. Although a review of separate analyses
suggests that higher abnormal returns accompany tender offers [Jensen and
Ruback (1983)], direct comparisons between mergers and tender offers have
not been reported in the literature. In addition, only limited (and in some
cases conflicting) evidence exists on the second and third hypotheses.
Tests of these hypotheses are important for several reasons. Although
announcement-period returns vary widely, we have little information on the
causes of this variation. Tests of the hypotheses are also important from a

‘The authors would like to thank K.C. Ghan, Peter Frost, Michael Jensen, John Long, Paul
Malatesta, David Mayers. Thomas Miller, David Nachman, Edward Rice. Richard Ruback,
Bemell Stone, Rem5 Stulz. Ross Watts (the referee), and the participants in the finance workshops
at Georgia Institute of Technology, Ohio State University, and the University of Washington for
their helpful comments.

0304-405X/87/$3.50 & 1987. Elsevier Science Publishers B.V. (North-Holland)

330 Y.S. Huung and R.A. Wulkhng, Acquwrlon announcements and abnormal returns

public-policy perspective because there is considerable concern about the

effects of managerial resistance, payment form, and type of acquisition on
shareholder welfare. Examining the hypotheses also should yield insight into
the strategic decisions surrounding an acquisition: type of acquisition and
form of payment are decision variables to the bidding management, whereas
resistance to an offer is a decision variable of the target management.
The sample analyzed here consists of all initial acquisition announcements
appearing on the front page of the Wall Street Journal over the period April
1977 through September 1982. This avoids the ex post selection and classifica-
tion bias described by Jensen and Ruback (1983). That is, the sample com-
prises all front-page Wall Street Journal acquisition announcements. not just
the successful cases. Announcements are classified in three dimensions: type of
offer (merger, tender offer, or undisclosed), form of payment (cash, stock,
mixed, or undisclosed), and degree of target-management resistance (friendly,
unfriendly, or neutral). Previous research fails to consider these three dimen-
sions simultaneously.
The research presented here indicates that the higher abnormal returns in
tender offers as compared to mergers are related to factors other than type of
acquisition. After isolating the effect of payment method and degree of
resistance, no significant difference remains. Managerial resistance is associat-
ed with marginally, but insignificantly, higher abnormal returns, and these
effects remain after controlling for form of payment and form of acquisition.
Cumulative abnormal returns differ significantly and most dramatically with
the form of payment. Cash offers involve substantially higher abnormal
returns than stock offers.
The paper is organized as follows: Section 2 discusses hypotheses relating to
differences in acquisition returns. Section 3 outlines the statistical methods
used in the research. Results and concluding remarks are presented in sections
4 and 5, respectively.

2. Hypotheses

2.1. Background
Price behavior surrounding an acquisition announcement reflects the joint
effect of all information released in the announcement. Halpem (1983, p. 298)
notes:
‘A merger or a tender offer provides a bundle of signals all of which
generate information that is reflected in the security prices of the par-
ticipants. These signals give information on the event itself, the identity of
the acquirer, and the method of payment, among others . . - To disentan-
gle the impact on the security prices of all of these signals and thereby
evaluate the underlying motivation for the merger is very difficult.’
 Y.S. Huung und R.A. Walklrng Acquwrlon announcements and abnormal returm 331

The acquisition literature has addressed the issue of disentanglement by

constructing samples that exclude particular signals or factors. Examples
include analyses of: resisted and unresisted cash tender offers (mergers and
non-cash offers excluded) by Kummer and Hoffmeister (1978). completed and
cancelled mergers (tender offers excluded, form of payment not considered) by
Dodd (1980). and cash and securities mergers (tender offers excluded, degree
of resistance not considered) by Wansley, Lane and Yang (1983) and Gordon
and Yagil (1981). Gordon and Yagil also confine their analysis to pure
conglomerate mergers (i.e.. mergers of totally unrelated enterprises).
The approach used here is to include all categories of factors in the sample
and disentangle their respective importance by statistical means. This ap-
proach is essential when the various factors are interdependent.

2.2. Form of acquisition

Bradley and Kim (1985) argue that the choice between merger and tender
offer in an acquisition is motivated by cost and that the cost of acquiring a
firm is linked to the control premium required by target management. A
premium for control need not be offered unless target management’s share-
holdings are sufficient to block the transfer of control.
Mergers permit payment of this control premium directly to target manage-
ment in the form of post-acquisition contracts. Otherwise. control-related
increments in the tender premium or exchange ratio go to all shareholders,
including non-managers. Thus. merger agreements allow separate payment of
the control premium to those parties that require it. Bradley and Kim argue
that this implies target shareholders will earn lower premiums in mergers.
Comment and Jarrell (1986), however, note that tender offers can also involve
prior pre-announcement negotiations. Thus, the existence of any control
premium related to form of acquisition becomes an empirical issue.
We are not aware of any direct tests of the effect of form of acquisition on
shareholder wealth. Jensen and Ruback (1983) suggest that larger target
residuals are earned in tender offers than in mergers. They compute an average
of the abnormal returns reported by various studies, weighted by the different
sample sizes involved. For mergers, the weighted abnormal target firm return
is 16.3% over the month before announcement. For tender offers, the weighted
target firm return is 30.9% over the (approximately) two-month period sur-
rounding the announcement dates. ’ The magnitude of this difference is inter-

‘These percentages are weighted averages of the figures reported by Jensen and Ruback for
successful and unsuccessful acquisitions. In tender offers, for example. Jensen and Ruback
estimate an average target return of 29.09% for 653 successful tender offers and 35.17% for 283
unsuccessful tender offers. The weighted average of these figures is 30.92%. Similarly, the weighted
average of 16.33% for merger targets is a combination of the 15.90% earned by 457 successful
mergers and 17.24% earned in 219 unsuccessful mergers. Their figures are not adjusted for any
effects caused by overlapping samples.
esting. particularly since mergers involve an exchange of all of a target firm’s
shares, whereas tender offers are often for less than 100% of the target firm’s
shares.
Differences in sample periods among the various studies make a direct
comparison between mergers and tender offers difficult. Moreover, most
studies use sample periods in the 1960’s and 1970’s and are subject to
confounding effects caused by legislative changes such as the Williams Act.
Jarrell and Bradley (1980) note that the enactment of the Williams Act in 1968
and amendments in 1970 had a material effect on the market for corporate
control. It is plausible that the act had more impact on hostile tender offers.

2.3. Form of payment

Factors that may influence choice of payment method include taxes,

accounting treatment, compensation effects, regulatory requirements, and
agency problems.’

2.3.1. Personal taxes

The taxability of gains to target shareholders is determined largely by the

payment method. In general, a tax-deferred acquisition requires target share-
holders to continue ownership in the combined firm after acquisition. A stock
transaction that involves exchange of voting shares is tax-deferred. Since a
cash acquisition requires target shareholders to exchange ownership for cash,
the transaction is necessarily taxable. Transactions that use other payment
methods (e.g., convertible preferred stocks) can be tax-deferred or taxed
immediately, depending on the specific situation. According to the tax argu-
ment. cash offers have higher returns that stock offers to compensate target
shareholders for the immediate payment of taxes.

2.3.2. Accounting treatment

The payment method also affects accounting treatment and has tax implica-
tions for bidders. The major accounting treatments for acquisitions are the
pooling and the purchase methods. In the pooling method, the book value of
the combining firms’ assets, liabilities, and equities are simply added together.
Specific guidelines must be met before a firm can use the pooling method. This
method cannot be used, for example, in pure cash offers because of the
requirement that the acquired firm’s stockholders maintain an ownership
position in the surviving firm.

‘Another issue related to form of payment concerns the distribution of voting rights following
acquisition. Exchange of stock between target and bidder produces a partial dilution of exisiting
voting rights for the bidder’s old shareholders. Purchasing the target firm’s shares for cash avoids
this redistribution.
 ly.S. Hung and R.A. Wulklrng. .Acquslrron announcemenu and abnormal returns 333

The purchase method requires that any excess of purchase price over
appraised value be reported as good will and amortized. The amortization
reduces reported earnings but is not deductible for corporate tax purposes and
does not cause a change in cash flow. Changes in cash flow are possible,
however, since the acquired firm’s assets are valued as appraised for deprecia-
tion purposes. Higher appraisals increase the amount of depreciation, reduce
taxes, and cause a commensurate increase in cash flow.

2.3.3. Compensation eflects

The choice of payment method may also be related to managerial com-
pensation plans. Managements whose compensation is based heavily on market
performance, for example, should favor accounting treatments that increase
cash flow. Managements whose compensation is directly liked to accounting
measures of performance would prefer to avoid the amortization of good will.

2.3.4. Agency efects

Jensen (1986) suggests an agency rationale behind a bidder’s use of cash to
finance acquisitions. According to Jensen, managements will prefer using ‘free
cash flow’ to expand the resources under their control rather than returning
excess amounts to shareholders. Free cash flow is defined as cash flow in
excess of the amount required to finance positive net present-value projects.
Consequently, firms with excess cash flow have incentives to use this cash in
acquisitions, and the payout of the cash will cause an increase in value when it
substitutes for internal investment in unprofitable projects.

2.3.5 Regulation effects

The form of payment will influence bidding strategy if it affects the

anticipated net present value of an acquisition. Payment methods can affect
net present values through interrelations with either acquisition cost (i.e., size
of premium) or the probability of success, or both.
Wansley, Lane and Yang (1983) note that in stock offers a bidding firm
must obtain approval from the Securities and Exchange Commission (through
a registration statement) before target shareholders begin. to tender their
shares. This process could take several months. In contrast, a bidding firm
paying cash could start to acquire target shares within several weeks. Thus,
cash offers facilitate speedier acquisition transactions.
Faster transactions could be crucial for the success of a hostile acquisition
offer. Longer processing time for a stock offer gives target management more
opportunity to implement a defense. Additional bidders (favored by target
management) also could be induced to join the competition. For example,
target management can selectively reveal inside information about the target
334 ):S. Hung und R.A. Walkhng, rlcqwsrtlon announcements and abnormal rerurns

firm’s value to preferred bidders. This information may result in an upward

revision of cash-flow estimates or reduction in uncertainty faced by such
bidders, or both. As a result favored bidders could offer higher premiums.
Consequently, hostile stock offers may have a lower probability of success
than those for cash.

2.3.6. Implications and previous evidence

The net influence of regulatory delays on announcement-period returns is
not obvious. Measured abnormal returns will incorporate both probability of
success and premium level. The net effect will depend on the magnitude of
premium adjustment and the revised probability associated with it.
The tax hypothesis implies higher returns for cash offers; this is consistent
with existing evidence. Both Gordon and Yagil(l981) and Wansley, Lane and
Yang (1983) observe higher abnormal returns for cash offers than for stock
offers. Wansley, Lane and Yang examine completed mergers over the period
1970-78. Gordon and Yagil examine completed pure conglomerate mergers
over the period 1948-76. Pure conglomerate mergers are defined by the FTC
as involving the consolidation of two essentially unrelated firms. Product-
extension and market-extension mergers, which the FTC also describes as
conglomerate, are excluded from their analysis. The current research should
indicate whether the results of these two studies are affected by degree of
resistance, form of acquisition, or restriction to completed mergers.

2.4. Managerial resistance

The shareholder-welfare hypothesis suggests that managerial resistance to

an acquisition offer may be in the shareholders’ interest. Resistance could
result in higher premiums from the current bidder or from another firm. This
hypothesis predicts that managerial resistance will be associated with a posi-
tive price impact.
The managerial-welfare hypothesis suggests that resistance to an acquisition
offer reflects managers’ efforts to preserve job security and perquisite con-
sumption by reducing the probability of takeover. When conflicts of interest
exist, management maximizes its welfare at the expense of shareholders.3
Managerial resistance can impose significant costs on shareholders when:
(1) management expends corporate resources to resist beneficial takeovers,
(2) managerial efficiency is reduced because of less outside monitoring, and

3Strictly speaking, the shareholder-welfare hypothesis and the managerial-welfare hypothesis

need not be mutually exclusive, In the literature. however, the managerial-welfare hypothesis
typically refers to those situations in which management maximizes its own welfare at the expense
of shareholders. See. for example, Dann and DeAngelo (1983, p. 278) and Bradley and Wakeman
(1983. p. 305).
 Y.S. Huang and R.A. Walkhng, Acqu~rron announcemenrs and abnormal returns 335

(3) shareholders lose the opportunity to realize gains from a premium offer.
This hypothesis predicts a negative price impact from managerial resistance.“
Kummer and Hoffmeister (1978) report higher abnormal returns during the
initial announcement month for resisted tender offers. This is consistent with
the shareholder-welfare hypothesis. Dodd (1980) however, finds a price de-
cline when management vetoes a merger proposal. This is consistent with the
managerial-welfare hypothesis. Walkling and Long (1984) find that resistance
is conditioned on potential wealth gains to target management. Moreover, the
differential wealth gain available to target management derives from differ-
ences in share ownership, not from differences in bid premiums. On average,
managements that resist tender offers hold a significantly smaller fraction of
their firms’ shares than managements that do not resist. The average bid
premium for resisted offers is insignificantly different from that for unresisted
offers.
Previous research has examined the economic impact of specific defensive
strategies employed by target management. 5 The results of these studies are
mixed. The adoption of anti-takeover amendments and a change in the state of
incorporation do not seem to materially affect shareholders’ wealth. Defenses
that are not subjected to shareholder vote, however, such as standstill agree-
ments, premium buybacks, poison pills, and defensive asset and ownership
adjustments, appear to hurt shareholders. The initial expression of resistance,
examined in this research, is not subject to shareholder vote.

2.3. Summary of hypotheses

The hypotheses presented in the previous sections are summarized as

follows:

H,: Cumulative abnormal returns surrounding the announcement of tender

offers exceed those surrounding mergers.

’ Walkling (1985) finds that managerial resistance lowers the probability of success. Jensen and
Ruback (1983) note that resistance increases acquisition costs for bidding firms. Higher costs in
hostile acquisitions cause bideding firms to forego some acquisition attempts that otherwise (i.e.,
without resistance) would have been profitable. Abandonment of these attempts produces what
Jensen and Ruback term the truncation phenomenon. The effects of this phenomenon on
hypotheses about managerial resistance are discussed later.
‘Research on specific defensive tactics includes analyses of premium buybacks [Drum and
DeAngelo (1983). Bradley and Wakeman (1983)], standstill agreements (Dann and DeAngelo
(1983)]. anti-takeover amendments [DeAngelo and Rice (1983). Lima and McConnell (1983)],
poison-pill securities [Malatesta and Walkling (1985)]. and defensive asset and ownership adjust-
ments in asset and ownership structure [Dann and DeAngelo (1985)].
Additional insights into the importance of managerial control are offered by Stulz (1986), who
states that firms with higher levels of managerial voting rights have less need for specific defensive
tactics. since voting control itself is a deterrent to hostile acquisition.
336 Y.S. Hung and R.A. Wulkhng Acqulsmon announcements and abnormal rerurns

Hz: Cumulative abnormal returns surrounding the announcement of cash

offers exceed those surrounding stock offers.
H,: Cumulative abnormal returns surrounding the announcement of resisted
offers differ from those surrounding friendly offers.

The alternative hypotheses assert no difference in cumulative abnormal returns

for the groups cited.
The three null hypotheses are related and should be tested simultaneously.
Hostile acquisitions, for example, are frequently associated with tender offers.6
Higher abnormal returns for a sample of tender offers could be due to a higher
incidence of resistance rather than form of acquisition. Similar logic relates to
form of payment. Historically, tender offers have been associated with cash
payments; mergers have been associated with stock payments. Thus, abnormal
returns associated with tender offers could be measuring a premium associated
with payment media rather than form of acquisition. The relative importance
of payment media, resistance, and form of acquisition remains to be tested.

3. Research design

3. I. Data collection

To reduce ex post selection and classification bias, we constructed our

sample using acquisition announcements rather than lists of completed
acquisitions. Acquisition-related announcements are defined as acquisition
news items appearing on the front page of the Wall Street Journal. The sample
includes all firms with initial front-page announcements over the period April
1977 through September 1982. CRSP (Center for Research in Security Prices
at the University of Chicago) daily returns must also be available over the
analysis and estimation periods.
Front-page announcements are likely to be more ‘newsworthy’ (e.g., involve
larger transactions). The Wall Street Journal daily news editor informed us
that the major criterion used in selecting front-page acquisition items is total
transaction value (shares sought times prices offered); price movement itself is
a minor (if not trivial) consideration.
Specific announcement information for firms passing the screening criteria
is obtained from the associated article in the Wall Street Journal. Announce-
ments are classified by type of acquisition (merger, tender offer, or undis-

6Target-firm directors can veto a merger proposal without referring it to stockholders. In an

unnegotiated tender offer, the bidding firm bypasses target management and asks target share-
holders to tender their shares. Thus, shareholders decide on an individual basis whether to sell.
Although target management can still influence the outcome through various defensive strategies,
tender otTers permit bidding firms to circumvent target-management approval and are especially
useful in hostile takeovers.
 Y.S. Huung und R.A. U’ulkltng, Acqutsttton announcements and abnormal returns 337

closed). form of payment (cash, stock. mixed payment. or undisclosed), and

degree of resistance (favorable, unfriendly, or neutral).’ Classifications are
based on stated characteristics and are confirmed through details of the article
(e.g.. tender offers involve the sale of shares rather than the voting of shares at
a shareholder meeting).
Classifications are generally straightforward. For example, typical phases
pertaining to managerial reaction were:

favorable - agreed to be acquired, signed letter of intent, pleased about the

offer:
unfacorable - rejected the bid, strongly opposed, spumed the offer;

neutral - no comment, details not disclosed, holding preliminary talks, will

study an acquisition proposal.8

Announcement period returns are measured over days -1 and 0. News

reports on day 1 pertain to events that occur on day 0. These events could
affect the day 0 stock price if they occur before the market closes on day 0.
This potential bias is avoided by examining the Wall Street Journal Index to
detect confounding news events reported on day 1 or over any trade-halted
period around the announcement date. Confounding reports are those that
would alter the classifications established on day 0 or otherwise distort day 0
returns. An example of a confounding event would be the announcement on
day 1 that an acquisition will be contested when the initial announcement had
indicated a neutral position. Another example would be the announcement of
an FTC antitrust suit. Target firms with confounding news items are excluded
from the final sample.

3.2. Measuring abnormal returns

The market model is used as the benchmark for predicting returns. It

specifies the followin, 0 linear relationship between security j returns and
returns on a market portfolio:

R,r = ‘Yj + P,Rmt+ &,t, (1)

where
Rjt = the daily rate of return on security j over day t,
R ml = the daily rate of return on the CRSP value-weighted market index over
day t,

‘Mixed-paymentoffersinvolved combinations of two or more payment media (cash. stock. and

debt). Specific proportions of the combinations were not always announced.
‘Detailed lists of typical phrases relating to the classifications are available from the authors
upon request.
338 Y.S. Huang and R.A. Walkling, Acqumfton announcemenrs and abnormal remrm

P, = cov(R,,, R,,V’W LL
aJ = expected value of (R, - p, R ,), and
EJf = model error term of security j over day t, with expected return equal to
zero, constant variance and COV(E,,rJ) = 0 for i f j.
The estimation period is from trading day t - 300 through trading day
t - 51, with respect to the initial acquisition announcement.
Let &, and @, represent estimates of model parameters aJ and p,. The
abnormal return is computed as the difference between actual observations
and estimated returns:

ARJ, = Rj, - [ 6/ + iijRm,], (2)

where AR,, is the estimated abnormal return for security j over day r, and t is
the t th day of the analysis period, measured in relation to the initial acquisi-
tion announcement date.
The average abnormal return on a portfolio of target firms is obtained by
aggregating all abnormal returns on each event day t and dividing by J, (the
number of firms with return data on day t):

AR, = (AR,, + AR,, + . . + +AR,,)/J,. (3)

Cumulative abnormal returns (CAR) over the announcement period sum-

marize percentage price changes over the two-day period: 9

CAR( -1,0) =AR_, + AR,,. (4)

Cumulative pre-announcement abnormal returns are computed for the 49

trading days before day - 1, i.e.,

CAR(-50, -2) =AR_,+AR_,,+ ... +AR_,. (5)

Cumulative post-announcement abnormal returns are examined over the 50

trading days following the initial acquisition announcement:

CAR& 50) = AR, + AR, + . . . +AR,,. (6)

‘To the extent that acquisition announcements are partially anticipated, the measured residuals
will understate the total effect [see Malatesta and Thompson (1985)]. To attenuate such bias, the
sample includes only cases where no other acquisition-related announcement has occurred in the
preceding six months. It seems unlikely that any remaining effects of anticipated offers would bias
the analysis. For example, the form of payment would probably not be anticipated for a period of
greater than six months’ duration. The exception may be that a merger is anticipated subsequent
to an initial tender offer. No incidence of a tender offer followed by a merger was found in our
sample.
 Y.S. Huang und R.A. Wulkling, Acqulrltion announcements and abnormal returns 339

The statistical significance of the average abnormal return is evaluated by

computing the relevant t-statistics.“’

3.3. Statistical model

Tests of the hypotheses described in section 2 are constructed from the
coefficients of eq. (7) a multiple regression with binary independent variables.

y, = PO+ Pl% + PPz,+ &Yl, + P.aY*,+ PSh

+ &“l, + P7%+ PFL,* (7)

Continuously compounded returns (i.e., x = C:,~,ln[l + AR,]) are used to
alleviate a tendency toward positive skewness. The results are not sensitive to
this transformation. ok,, yli, and v,,,, represent binary variables coded accord-
ing to information released in the ith firm’s initial announcement. (The i’s are
suppressed in the definitions below.)

a1 = 1 if the form of acquisition is a tender offer.

LY?= 1 if the form of acquisition is undisclosed.
yt = 1 if the form of payment is cash.
yr = 1 if the form of payment is mixed.
yJ = 1 if the form of payment is undisclosed.
7~~= 1 if target management is opposed to the offer.

“‘The following steps summarize the procedure to compute a r-statistic for an average abnormal
return. The first step involves computing the standard error for the return series of each security
over the estimation period. i.e.,

where SE, is the standard error of security j, R, is the sample mean of security j’s returns, N, is
the number of observations of security j over the estimation period, and I are the trading days
over the estimation period.
The second step involves computing the standard error for the aggregate portfolio return over
each day in the analysis period:

SE,={[SEf+SE;+ . . . +SE;]/$}“‘,

where SE, is the standard error of the return on the aggregate portfolio on day r, and J, is the
number of available sample firms on day r.
The standard error for the cumulative abnormal return over a specific time interval can be
computed in a similar fashion. The third step involves computing r-statistics by dividing abnormal
returns by the relevant standard errors. For more detailed descriptions of these computations, see
Brown and Warner (1980). There are other slightly different versions used to compute the
r-statistics. In general, such differences do not affect the test of statistical significance. See, for
example, Brown and Warner (1980,1985).
340 Y.S. Huong and R.A. Walk@, Acquismon unnouncemenfs and abnormal returns

7rZ= 1 if target management’s attitude is undisclosed.

(Ye. y,, and r,,, are otherwise set equal to zero.
/3,( i = 0,1, . . . ,7) are parameters of the model.
CL,is an error term assumed to be normally distributed with zero mean and
constant variance; cov(j.t,, pj) = 0 for i +j.

Cases implicity coded in the intercept term represent announcements where

the form of acquisition is merger, the form of payment is stock, and the target
management attitude is friendly.
Tests of hypotheses 1 through 3 are equivalent to tests of the coefficients p,.

Hi: pi 2 0 (tender offers vs. mergers).

Hz: & 2 0 (cash offers vs. stock offers).
H,: &, it 0 (resisted offers vs. friendly offers).

Under the null hypotheses, the coefficients are zero and distributed according
to the r-distribution.

4. Results

4. I. Distribution of announcements
Between April 1977 and September 1982, 326 target firms (listed on the
CRSP tapes) initially appeared in acquisition-related announcements on the
front page of the Wall Street Journal. Screening rules eliminated 122 firms,
leaving a final sample of 204. The 122 firms eliminated comprise (1) 20 cases
with missing daily return data over the pre-announcement and announcement
periods, (2) 19 firms having confounding announcements, and (3) 83 invest-
ment offers. (Investment offers are those in which one party purchases small
fractions of shares in another firm and states that the purchase is ‘for
investment only’). Details on a year-by-year basis are given in table 1.
Table 2 presents the distribution of announcements over the entire sample
and various classifications. Cell sizes for the ten categories explicitly or
implicity coded in eq. (7) are indicated with an asterisk. The smallest of these
cell sizes is 27 (for announcements where management opposes the offer).
Analysis of table 2 reveals that for the overall sample, target management
usually either maintains a neutral position (38%) or expresses a favorable
attitude (49%). Only a small fraction (13%) of managements express resistance
in the initial announcement. This is not true, however, for certain subsamples.
For example, 66% of stock offers involve friendly managerial reaction; only
50% of reactions to cash offers are friendly. Mergers involve a higher percent-
age of friendly managerial reactions (64%) than tender offers (37%). Consistent
 Y.S. Huung und R.A. b4’ulXlrng,
Acqursrtron unnouncemenrs and abnornud mums 341

Table 1
Frequency of initial acquisition-related announcements appearing on the front page of the &‘u/l
Srreer Journul over the period April 1977 through September 1982. The initial population consists
of announcements where target firms are listed on the CRSP tapes. Deletions resulting from
screening rules are also shown.

1977 1978 1979 1980 1981 1982 Total

(a) Initial population size 31 60 69 65 72 29 326

(b) Deletions”
Investment offers 3 8 23 19 24 6 83
Missing data on CRSP tape - 7 3 6 3 1 20
Confounding announcements
Day 1 announcements 2 2 2 - - - 6
Suspended-trade period
announcements 1 4 2 - 5 1 13
Final sample B m B w 3Ti J-l 204

“The initial sample contains 85 cases with other announcements on day 1. Most of these
announcements appear innocuous (i.e.. unrelated to acquisition and unlikely to have distorted
returns). However. six of these cases are identified as having confounding information (i.e..
information that would alter the announcement-day classifications and/or distort announcement-
day returns).
The initial sample contains 20 cases with announcements over a suspended trade period
surrounding the initial announcement. Thirteen of these cases are identified as having confound-
ing (potentially biasing) information.

Table 2
Distribution of characteristics for initial Wull Srreer Journul (front-page) acquisition announce-
ments over the period April 1977 through September 1982. Classifications are based on the
front-page announcement and the accompanying article. Sample size is 204. Cell sizes for
variables explicitly or implicitly coded in eq. (7) are indicated with asterisks.

Form of payment
Type of Managerial Not
acquisition reaction” Cash Stock Mixed disclosed Totals

F 25 21 13 6 65
Merger 0 1 1 3 0
r\; 7 10 7 7 3:
-
33 .32 23 13 101’
Tender F 21 0 5 1 27
0tTer 0 13 0 2 3 18
s 25 0 3 29
59 0 8 7 74’
Not F 5 0 1 7
disclosed 0 0 1 2 4
K : 0 3 12 18
9 T -Y T- 291
Totals 101’ 32’ 36’ 35’ 204

“Coding and subtotals for degree of resistance are F = friendly (N = 99)‘. 0 = opposed
( IV = 27)‘. N = neutral (N = 78)‘. Cell sizes for variables explicitly or implicitly coded in eq. (7)
are indicated with asterisks.
342 Y.S. Huung und R.A. Wulkhng. Acqumlron announcemenrs and abnormul remns

with conventional wisdom, a hostile acquisition appears more likely to be

undertaken through tender offer than through merger and is more likely to be
a cash offer than a stock offer.
Cash represents the major payment method for the entire sample, account-
ing for 50% of all observations. The percentage of tender offers involving cash
is substantially higher: 80% of the tender offers involve pure cash transactions.
Interestingly, there are no pure stock offers among the tender offers. Mergers
involve a more even usage of cash and stock. The merger subsample consists
of 33% cash offers and 32% stock transactions, with mixed and undisclosed
cases accounting for the remainder.
Tender offers (36%) and mergers (50%) make up most of the sample, with
only 14% of the announcements not revealing specific acquisition type. For the
99 announcements with favorable managerial attitude, the major type of
acquisition is merger (66%). In contrast, tender offers account for 67% of the
subsample with unfriendly managerial reaction. This pattern is consistent with
an earlier observation. Mergers require approval from target management.
Initial merger announcements are likely to cite friendly target reactions.
Tender offers account for 58% of the 101 cash offers; mergers account for a
smaller portion (33%). The 32 pure stock offers are used exclusively in mergers.
For the 36 mixed-payment offers, the major type of acquisition is merger
(64%). followed by tender offers (22%).

4.2. Target-firm abnormal returns

With one exception, estimated betas (systematic risk) for all target firms are
positive. The mean and median of the estimated betas are 1.03 and 0.92,
respectively.
Table 3 presents average abnormal and cumulative abnormal returns for the
entire sample over the period t - 50 through t + 50. Over the pre-announce-
ment period, the average daily abnormal return is no more than 0.3% until day
- 8 and is less than 1% until day - 3. From day - 50 to day -2, the
cumulative average abnormal return for the entire sample amounts to 9.1%.
Over 71% of the target firms have positive abnormal returns for this period.
For the two-day announcement period, target-firm shareholders earn an
average abnormal return of 23.4%. A positive abnormal return is earned by
91% of the sample firms. The r-statistics provide strong evidence that cumula-
tive abnormal returns over the pre-announcement and announcement periods
are significantly positive.
The cumulative abnormal return declines 1.8% over the 50-day post-
announcement period. Approximately 54% of target firms have negative
CAR’s during this period. A negative abnormal return over the post-announ-
cement period is not uncommon in the literature. For example, Dodd (1980,
p. 112) reports a 3% price decline over the 40 post-announcement trading
days for 151 target firms involved in mergers.
 Y.S. Huung und R.rl. Walkling, Acqumrlon announcements and abnormal returns 343

Table 3
Average daily abnormal returns and cumulative abnormal returns for 204 target firms from 50
days before through 50 days after the initial Wall Sweet Journal acquisition-related announce-
ment. The sample period is from April 1977 through September 1982.

r-statistics for
Average abnormal average abnormal
returns returns
Day Cases Daily Cumulative Daily Cumulative

- 50 204 0.002 0.002 1.003 1.003

-40 204 0.000 0.003 0.216 0.515
- 30 204 - 0.001 0.003 - 0.874 0.438
- 20 204 0.001 0.020 0.685 2.146
- 19 204 0.001 0.021 0.435 2.189
- 18 204 0.001 0.022 0.895 2.312
- 17 204 O.OGO 0.022 0.155 2.304
- 16 204 O.OCG 0.023 0.100 2.288
-15 204 0.000 0.022 -0.101 2.239
-14 204 - 0.001 0.022 - 0.332 2.154
-13 204 OH@ 0.022 0.175 2.154
- 12 204 0.003 0.025 2.014 2.448
-11 204 0.002 0.027 1.159 2.601
- 10 204 O.OC@ 0.027 - 0.176 2.541
-9 204 O.OQO 0.027 - 0.238 2.474
-8 204 0.004 0.031 2.549 2.834
-7 204 0.004 0.035 2.602 3.194
-6 204 0.002 0.038 1.463 3.376
-5 204 0.008 0.046 4.717 4.035
-4 204 0.008 0.053 4.505 4.649
-3 204 0.010 0.063 6.181 5.492
-2 204 0.028 0.091 16.536 7.798
-1 204 0.143 0.234 85.738 19.845
0 204 0.093 0.327 55.694 27.448
1 204 - 0.001 0.325 -0.613 27.098
2 204 - 0.003 0.322 - 1.869 26.584
3 204 - 0.003 0.320 - 1.511 26.131
4 204 O.CQO 0.320 0.021 25.895
5 204 0.001 0.321 0.579 25.741
6 204 - 0.002 0.318 - 1.425 25.325
7 204 0.000 0.318 - 0.188 25.081
8 204 - 0.001 0.317 - 0.549 24.796
9 204 0.003 0.320 1.700 24.808
10 203 0.004 0.324 2.337 24.903
11 203 - 0.001 0.323 -0.587 24.626
12 203 - 0.002 0.321 - 1.449 24.247
13 203 0.001 0.321 0.448 24.113
14 203 0.001 0.323 0.697 24.013
15 203 - 0.003 0.320 - 1.591 23.634
16 203 0.004 0.324 2.450 23.756
17 203 - 0.002 0.322 - 1.242 23.430
18 203 - 0.002 0.320 - 1.246 23.109
19 202 0.000 0.319 -0.190 22.919
20 201 0.001 0.320 0.599 22.826
30 197 -0.000 0.309 - 0.056 20.563
40 191 - 0.004 0.311 - 2.340 19.499
50 180 0.002 0.309 1.214 18.291
344 1:s. Huang and R.A. Walkhng, Acqulslrlon announcemems and abnormal returns

Table 4
Announcement-period abnormal returns for specific classifications of 204 target firms in the
period April 1977 through September 1982. Returns shown are cumulated over the announcement
period (i.e., r = - I * t = 0).

Classification Number of firms 90 abnormal return

A. Tape o/ucqursrrion
Tender offer 74 27.5%
Merger 101 22.6
Not disclosed 29 16.7
B. Pyrmenr method
Cash 101 29.3
Stock 32 14.4
Mixed 36 23.3
Not disclosed 35 15.4
C. Turger muwgemerrt ‘s urtrrude
Resisted 27 28.3
Friendly 99 22.6
Not disclosed or neutral 78 23.1

Negative post-announcement results could result from overestimates of (Y,

in the estimation period. Sensitivity tests using different estimation periods.
however, produced similar results (see section 4.4). The slightly decreasing
sample size over the post-announcement period reflects the successful acquisi-
tion of some target firms.
Average CAR’s for subsamples of tender offers and mergers are displayed in
table 4. The average CAR for tender offers is 27.5%. The corresponding value
for mergers is 22.6%. Residuals for cash offers average 29.3%, whereas those
for stock offers average 14.4%. Mixed-payment offers also are associated with
higher abnormal returns than pure stock offers. The exact mixture of cash.
debt, and stock could not be determined for many of the Wall Street Journal
announcements. The results, however, are consistent with higher premiums in
cash offers. The average abnormal return for the 36 mixed-payment offers is
23.3%, which lies between the values reported for stock and cash offers.
Resisted offers have abnormal returns averaging 28.3%; the corresponding
figure for friendly offers is 22.6%.

4.3. Regression results

4.3.1. Single-factor regressions

Table 5 reports regression results for eq. (7). Tests of the hypotheses are
equivalent to significance tests on coefficients of cash, resisted, and tender-offer
variables.
 Table 5
Rest&s of regressions of cumulative abnormal returns surrounding initial acquisition-related announcements made between April 1977 and September
1982. Regressions A through G and regression I use announcement-period abnormal returns as the dependent variable. Regression H uses
preannouncement plus announcement-period returns as the dependent variable. (All abnormal returns are continuously compounded.) r-statistics arc’
shown.in parentheses, The-number of observations-is 204 for all regressions except I, where the number of observations is X2.

Independent variables
Target management’s
Type of acquisition Form of payment attitude
Tender Neutral or
reeression Interceol” Offer Undisclosed Cash Mixed undisclosed Opposed U ndiscloscd
Ph P7 iP b
__-
A 0.190 0.047 - 0.038 0.035 3.639
(1.Y67)’ (-1.153)
I3 0.126 0.122 0.075 0.013 0.104 7.770
(3.965) (2.043)’ (0.358)
C 0.190 0.055 0.012 0.013 I.270
(1.5Y4) (0.4YO)
D 0.183 0.037 - 0.047 0.044 0.016 0.042 2.200
(1.478) (- 1.363) (1.221) (0.630)
E 0.126 - 0.002 - 0.044 0.127 0.0x2 0.033 0.112 5.003
( - 0.057) (- 1.357) (3.60Y)h (2.555)E (0.791)
F 0.115 -0.016 - 0.056 0.129 0.07’) 0.025 0.056 0.030 0.126 4.025
(-0.585) (- 1.553) (3.677)’ (2.092)h (0.5YX) (1.5Yl) (1.230)
<; 0.117 0.1 I6 0.06’) 0.00I 0.048 0.023 0. I I5 5.142
(3.724)” (1.X58)’ (0.01 X) (1.442) (0.962)
H 0.163 - 0.019 - 0.043 0.168 0.143 0.025 0.023 0.025 0.107 3.337
( - 0.490) ( -0.X75) (3.496)h (2.764)h (0.434) (0.476) (0.762)
1 0.088 0.006 0.173 0.041 0.21x 7.249
(0.138) (3.920)’ (0.7Y5)

“The intercept term implicitly represents cases where the type of acquisition is merger, the form of payment is stock, and target management’s
attitude is favorable. r-statistics test for significant deviations from these types of olfers. Regression 1 excludes cases where data is undisclosed (or
neutral) and where the form of payment is mixed.
‘One-tailed test signiticant beyond 0.01 level.
‘One-tailed test signiticant beyond 0.05 Icvel.

- , . - . . _. - -- -
346 Y.S. Huung und R.A. Wulkhng, Acqumrlon announcemenrs and abnormal returns

Regressions A through C present results of the single-factor regressions over

the two-day announcement period. Regression A reveals that the (continu-
ously compounded) abnormal return is 4.7% higher for tender offers than for
mergers. The t-statistic for this difference is equal to 1.97, which is significant
at the 5% level (one-tailed test). This finding is consistent with the comparison
of separate tender-offer and merger studies reported by Jensen and Ruback.
Regression B of table 5 reports a 12.2% difference between abnormal returns
in cash and stock offers. The t-statistic for the difference is a significant 3.97.
Comparisons of resisted versus friendly acquisition returns are shown in
regression C. Although resisted offers are associated with a 5.5% higher return,
the difference is not significant at conventional levels.

4.3.2. Interrelations among acquisition characteristics

The significant difference between the abnormal returns of tender offers and
mergers disappears when effects of payment and managerial resistance are
considered. In regression D, the return to mergers and tender offers is
examined simultaneously with variables expressing target management’s atti-
tude. Although the abnormal return remains 3.7% higher for tender offers, the
difference is now insignificant at the 5% level.
An alternate explanation for the higher abnormal returns in tender offers is
that they are at least partially attributable to effects of payment method. The
interrelations between payment method and form of acquisition (i.e., 80% of
tender offers were for cash) lend credence to this possibility. Indeed, when
form of payment is included (regression E) the announcement period abnormal
return is an insignificant 0.002 lower for tender offers than for mergers. Thus,
when method of payment is taken into account, there is little difference
between the abnormal returns in mergers and in tender offers.
Hypothesis Hi states that returns will be higher in tender offers than in
mergers. Regression F, which controls for both payment and resistance effects,
tests this hypothesis. The results indicate that mergers involve slightly but
insignificantly higher abnormal returns than tender offers. The t-statistic for
this difference is -0.585. Consequently, the null hypothesis of no difference
between the groups cannot be rejected.
In contrast, the difference between cash and stock offers remains dramatic
after controlling for resistance (regression G) and form of acquisition (regres-
sion E). Results from the full analysis (regression F) also confirm this finding.
Continuously compounded abnormal returns are 12.9% higher for cash offers
than for stock offers. The r-statistic for the difference is a significant 3.68. The
evidence is consistent with a tax explanation. The null hypothesis of equal
abnormal returns for cash and stock offers is rejected.
Differences between abnormal returns for resisted and unresisted offers are
shown in regressions D, G, and F. The results are consistent in sign with the
 Y.S. Huang and R.A. Walkling, AcquuAm announcements and abnormal returns 34-l

shareholder-welfare hypothesis (i.e., resistance is associated with higher re-

turns). The differences, however, are statistically insignificant at conventional
levels.
Some caution must be applied in interpreting the results regarding
managerial resistance. First, the results apply only to resistance as expressed in
the initial announcement. In many cases, target management’s attitude about
the offer is not disclosed in the initial announcement. A second caveat involves
the truncation effect [Jensen and Ruback (1983)]. Anticipated target-manage-
ment resistance could cause abandonment of low-valued acquisition attempts
before their announcement. Without knowledge of these missing observations,
it is impossible to draw conclusive inferences about the wealth impact of
managerial resistance.”

4.4. Sensitivity tests

Firm-specific abnormal returns are presumed to be independent, since they

are drawn from 204 different observations over a five and one-half year period.
The Goldfeld-Quandt test and examination of residual plots are consistent
with the assumption of homoskedasticity. Residual plots and tests for skew-
ness and kurtosis reveal only slight departures from normality. Analysis of
regressions A through G and examination of the correlations of regression
coefficients suggest that multicollinearity is not a serious problem.
Brown and Warner (1985) report that the estimation of abnormal returns is
generally insensitive to model selection. Nevertheless, several sensitivity tests
are performed in this study to ensure that the results are robust. These tests
include using the mean-adjusted return model and the market-adjusted return
model. In addition, the Dimson (1979) adjustment for infrequent trading and
Dodd and Ruback’s (1977) test for stability of beta are used. Alternate
estimation periods are also used in the sensitivity tests.12 Finally, a separate
set of sensitivity tests uses standardized abnormal returns as the dependent
variable. Results remain essentially the same.
To test whether the results are sensitive to the leakage of information in the
pre-announcement period, eq. (7) is estimated using continuously compounded
abnormal returns cumulated over the pre-announcement and announcement
periods (i.e., over days t - 50 through t = 0) as the dependent variable. The
results, shown in table 5 as regression H, are similar to those previously
reported.

“See Walkling (1986) for an extended discussion of truncation effects.

I2 First, day - 200 through day - 51 was used to test the sensitivity of the results to a shorter.
more current estimation period. Second, day -150 to day -51 plus the 100 tradinp davs
subsequent to the outcome date were used to test the sensitivity of the results to any shifts ‘m
systematic risk.
348 ):S. Huang and R.A. Walkhng, A cqurltlon announcemenrs and abnormal rerurn~

Regression I of table 5 excludes cases where data is undisclosed (or neutral)

and where the form of payment is mixed. Each of the remaining 82 announce-
ments could be classified as merger or tender offer, cash or stock, and opposed
or favorable. The results are similar to those for the entire sample (regression
F) except that the explanatory power of the regression has increased.

5. Summary

This paper examines the effects and interrelations of managerial reaction

(neutral, favorable, unfriendly), payment method (cash, stock, mixed, undis-
closed), and type of acquisition (merger, tender offer, undisclosed) on target-
firm abnormal returns. We have avoided ex post selection and classification
bias by taking our sample from initial front-page acquisition announcements
in the Wall Street Journal. Since the emphasis is upon announcement effects,
classifications are based on the original announcements and not on subse-
quently revealed information. Thus, the sample contains all initial front-page
announcements over the sample period, not just successful acquisitions.
Tender offers yield significantly higher returns than mergers. Tender offers,
however, are generally for cash and are more likely to be resisted than mergers.
After controlling for form of payment and degree of resistance, no significant
difference remains between tender offers and mergers.
Resisted offers earn statistically insignificant higher returns than unresisted
offers. Nevertheless, it is premature to conclude that resistance has no effect on
shareholder welfare. It is likely that resistance causes some bidders to abandon
otherwise profitable acquisition attempts before they are announced.
Cash offers are associated with significantly and substantially higher returns
both before and after controlling for type of acquisition and degree of
resistance. The effects are consistent with a tax explanation; shareholders
demand higher premiums in situations that will force them to pay immediate
taxes on their gains. Additional work is needed to explain why bidders would
be willing to pay tax premiums. Suggested avenues for future research include
analysis of bidding-firm tax motivations, compensation effects, and agency
(free cash flow) explanations.

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