A theory on merger timing and announcement returns

This paper develops a dynamic model for the timing and terms of mergers and acquisitions. Differently from previous models, we show that the firms agree about the timing, independently from how the merger surplus is shared. Firms always agree on the timing and discuss the sharing rule of the merger surplus according to their bargaining power or some other exogenous factor. We also show that, under asymmetry of information, the combination of surprises regarding merger timing and merger terms, can produce either negative or positive abnormal returns for the merging firms. ∗Corresponding author. School of Economics and Management. University of Minho. 4710-057 Braga (Portugal). E-mail: [email protected]; Phone: +351 253 601 923; Fax:+351 253 601 380. A theory on merger timing and announcement returns