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Economic Consequences of Announcing Strategic Alternatives

Zha Giedt, Jenny (2016): Economic Consequences of Announcing Strategic Alternatives.

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This paper documents the consequences of publicly announcing “strategic alternatives,” whereby the company reveals its decision to explore a potential sale or merger. The inherent uncertainty in ex-post transactional outcomes (i.e., whether the firm is sold, liquidated, or remains independent) allows me to identify positive and negative consequences differentially accruing to these subsamples. The public announcement of strategic alternatives is associated with excess takeover-related gains for firms that are subsequently acquired but abnormally negative returns for firms that are not subsequently sold. Tests of potential mechanisms are consistent with the public announcement generating greater investor attention and leading to a more informed M&A sale process that maximizes value for successful targets’ shareholders, while also being a costly admission of business problems that alienates company stakeholders and wears on operations. These consequences that are ultimately related to firm value underscore the varied costs and benefits managers should weigh when making this disruptive disclosure decision.

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