Failed Takeovers, Methods of Payment, and Bidder Returns.

This study documents bidding-firm stock returns upon the announcement of takeover terminations. On average, bidding firms that offer common stock experience a positive abnormal return, and firms that offer cash experience a negative abnormal return. The positive performance is primarily driven by bidders initiating the takeover termination. Common-stock-financed bidders earn a return not significantly different from that earned by cash-financed bidders when terminations are initiated by the target firm. The results are consistent with the asymmetric information hypothesis, that the decision not to issue common stock conveys favorable information to the market. In addition, bidder returns at takeover termination are positively related to the amount of undistributed cash flow, supporting the free cash flow hypothesis. Copyright 1998 by MIT Press.