Toeholds and Bid Timing: Recognizing the Option Value of Deferral

We partition takeover bids into two groups: those that are deferred from the date of a toehold purchase, and those that are coincident with a toehold purchase. Coincident bids alone have approximately zero abnormal returns at bid/toehold, but deferred bids have negative abnormals both in the pre-bid interval (representing bid anticipation) and at announcement. Negative returns are puzzling because of the implication that intending bidders should never defer. We classify deferred bids into those that should optimally have been deferred, and those that should not by devising a risk-neutral valuation procedure to measure the value of the option to defer. The negative returns are traced to a sub-group of deferred bids that should optimally have been coincident. We conjecture why non-optimally deferring bidders should behave in this way.