Target shareholder gains, peer firm values, and merger and acquisition announcements

An average M&A announcement increases the target's peer firm stock prices. While it is documented that an increased takeover likelihood increases the peer firm values, it is also possible that an increase in the expected shareholder gains, conditional on receiving an acquisition offer, affects the valuation of peer firms. In this paper, I document that peer firm abnormal returns during the announcement period are positively affected by the target firm announcement return and offer premium, which reflect target shareholder gains from the announced deal. Moreover, I find that target announcement returns are lower, on average, when the offer premium is lower than those of recent transactions in the industry. This paper highlights that investors reflect not only the increased takeover likelihood but also the revised expectations on the gains from a potential takeover bid in the valuation of peer firms.