1

Synergy Disclosures in Mergers and Acquisitions

Marie Dutordoir+, Peter Roosenboom++ and Manuel Vasconcelos++, a
+ ++

Manchester Business School, United Kingdom

Rotterdam School of Management, Erasmus University, the Netherlands

We examine the motivations for bidding-firm managers to disclose a forecasted synergy value along with the deal announcement. Our findings suggest that synergy disclosure decisions result from a trade-off between bidder managements need to signal the quality of the deal to its shareholders and the costs associated with providing inaccurate synergy estimates. Agency costs, antitrust regulations, proprietary costs, and the need to obtain shareholder approval are of secondary importance. After controlling for the endogeneity of the disclosure decision, synergy disclosures have a significant positive influence on acquirer announcement returns. This result suggests that synergy forecasts are an effective signaling mechanism to bridge the information gap between acquirer managers and shareholders.

Keywords: Mergers and Acquisitions; Synergies; Voluntary Disclosure JEL classification: G34, M41

The authors would like to thank Mathijs van Dijk, Ingolf Dittman, Mara Faccio, Dennis Fok, Renhui Fu, Ulrich Hege, Abe de Jong, Tomas Mantecon, Richard Paap, Buhui Qiu, Rui Shen, Frederik Schlingemann, Elvira Sojli, Sudi Sudarsanam, Marno Verbeek, David Yermack, and seminar participants at Catholic University of Louvain, Rotterdam School of Management, University of Twente, the Portuguese Finance Network Meeting in Ponta Delgada, and the FMA European Meeting in Hamburg for their helpful comments. Manuel Vasconcelos thanks the Calouste Gulbenkian Foundation and the Vereniging Trustfonds Erasmus Universiteit Rotterdam for financial support. a Corresponding author: Rotterdam School of Management, Erasmus University, Burgemeester Oudlaan 50, PO Box 1738, 3000 DR Rotterdam, The Netherlands, Phone: +31-(0)104082354, Fax: +31-(0)104089017, E-mail: mvasconcelos@rsm.nl.

Electronic copy available at: http://ssrn.com/abstract=1571546

2 When engaging in a merger or acquisition, managers have the option to publicly release a forecast of the synergies associated with their planned deal. The percentage of U.S. bidding firms that disclose a synergy value estimate along with the deal announcement has grown from 7% in 1995 to 29% in 2008. Despite this substantial increase in the use of voluntary synergy disclosures, we still know very little about the motivations for firms to engage in such disclosures. Our study aims to fill this gap in the literature. We derive six hypotheses on the potential determinants of synergy disclosures from existing studies on voluntary information disclosure (e.g., Verrecchia, 1990; Dye, 2001; Healy and Palepu, 2001; Verrecchia, 2001) and mergers and acquisitions (M&A) (e.g., Jensen, 1986; Travlos, 1987; Rhodes-Kropf and Viswanathan, 2004). We hypothesize that the decision to provide synergy estimates may be influenced by the level of uncertainty faced by acquiring-firm shareholders and managers regarding the deal value, the level of agency costs of the bidding firm, the likelihood of facing antitrust restrictions, the potential loss of proprietary information associated with the release of the synergy estimate, and the need to obtain shareholder approval for the planned deal. We test these hypotheses on a sample of 1,770 mergers and acquisitions involving U.S. public firms over the period 1995 to 2008.1 We hand-collect publicly-disclosed information related to each of these deals, and find that 315 or 17.8% of the transaction announcements are accompanied with a synergy estimate provided by bidder management. We henceforth label these deals disclosing deals. A univariate and multivariate comparison of the characteristics of disclosing and nondisclosing transactions indicates that acquirer managers are more prone to disclose

We use the terms merger and acquisition, as well as the terms acquirer and bidder interchangeably throughout the paper.

Electronic copy available at: http://ssrn.com/abstract=1571546

3 synergy estimates in deals financed with equity. In such deals, there may be a higher need to convince shareholders that the transaction is effectively inspired by shareholder value creation rather than by a temporary bidder overvaluation. This finding is consistent with the frameworks of Dye (2001) and Verrecchia (2001), which predict that voluntary disclosures can be used as a signaling tool to alleviate asymmetric information problems. On the other hand, in line with the model of Verrecchia (1990), we also find that synergy disclosures are less likely when the acquirers management faces more uncertainty regarding the true value of synergies, potentially resulting in a higher risk of incurring reputation loss and/or litigation costs. Consequently, the decision to release a synergy forecast may work as a signal of managers confidence in the quality of the deal and in the accuracy of the synergy estimate. To obtain more insight into the motivations for synergy disclosures, we also examine the impact of managerial synergy forecasts on acquirer stock price reactions. We calculate abnormal stock returns around the deal announcement date, which coincides with the synergy disclosure announcement for all disclosing deals in our sample. If synergy estimates act as a signal of deal quality, then we should observe more favorable announcement effects for synergy-disclosing acquirers, ceteris paribus. Once controlled for the endogenous nature of synergy disclosures, we indeed find a significantly positive impact of the synergy disclosure decision on acquiring-firm stock returns. Next to examining the discrete impact of the disclosure versus non-disclosure decision, we also analyze whether acquirer stock price reactions are increasing in the amount of the forecasted synergies accruing to acquiring-firm shareholders. We measure this amount (labeled Synergy Ratio) as the difference between the present value of

4 synergy-related cash flows and the takeover premium, scaled by the acquirers market value of equity. We find a significant positive impact of the Synergy Ratio on bidder stock returns, suggesting that the forecasted information is value-relevant and credible. However, we also find that the acquirers stock price capitalizes only a small fraction (less than 10%) of the information embedded in the Synergy Ratio. Our evidence suggests that this small capitalization percentage results from stockholders remaining uncertainty regarding the provided synergy forecast, rather than from market anticipation of, or underreaction to, this forecast. Surprisingly, we also find that more than half of the acquiring firms forecast synergy values smaller than the takeover premium. Our evidence indicates that acquirer managements fear for litigation costs associated with providing too high synergy estimates is an important driving force behind these Low Disclosed Synergy deals. The finding that litigation risk affects the disclosed synergy value suggests that this forecast is not always an unbiased estimate of the true synergies expected from a deal. To obtain further insights into the motivations for firms to engage in voluntary synergy disclosures, we investigate whether synergy disclosures have an impact on the likelihood of competition for the target, as would be expected when these disclosures enable competitors to free-ride on the bidders valuation of the target. We also analyze whether voluntary synergy forecasts result in a higher probability of successful deal completion, which would be the case if these forecasts are effective at increasing the likelihood of antitrust authorities and/or shareholders approval of the deal. We do not find evidence of an impact of synergy disclosure on competition or deal completion.

5 Overall, our results suggest that shareholder and management uncertainty regarding synergy values are the main driving forces behind voluntary synergy disclosures. Acquirer managers seem to trade-off their wish to cater to the information needs of their shareholders against the costs associated with disclosing uncertain synergy forecasts. We obtain only limited and unsystematic support for our hypotheses on the impact of agency costs, antitrust constraints, proprietary costs, and the need to obtain shareholder approval on synergy disclosure decisions. A small number of previous papers have examined managerial synergy forecasts. Houston, James, and Ryngaert (2001) document a positive stock price impact of projected synergy estimates for large bank mergers over the period 1985 to 1996. In a recent working paper, Bernile and Bauguess (2010) also report a positive stock price impact of synergy forecasts made by U.S. acquirers over the period 1990 to 2005. While these two studies mainly focus on stockholder reactions to synergy announcements, we conduct a comprehensive analysis of the determinants and stock price impact of synergy disclosures, as well as of their impact on takeover competition and deal completion. Our analysis of the market impact of synergy disclosures explicitly takes the non-random nature of the disclosure decision into account by modelling the choice to disclose and the market impact of disclosure announcements in one integrated framework. Devos, Kadapakkam, and Krishnamurthy (2009) also examine synergy estimates. However, their analysis focuses on the components of synergy values provided by analysts (i.e., financial versus operational synergies) instead of on the determinants of voluntary managerial synergy disclosures.

6 On a broader scale, our study contributes to the literature on the importance of information asymmetry in the context of M&A transactions (Hansen, 1987; Travlos, 1987; Moeller, Schlingemann, and Stulz, 2007; Officer, Poulsen, and Stegemoller, 2009). We hypothesize and empirically show that voluntary synergy disclosures can be used as a mechanism to signal the quality of the proposed acquisition, and thus improve market reactions to the deal announcement. The reason why not all firms engage in voluntary disclosure is that there are offsetting costs. More particularly, our findings suggest that managers refrain from mentioning synergy values along with the deal announcement when they cannot forecast these values with a reasonable level of accuracy. Our findings also contribute to the literature on voluntary managerial disclosure. A number of early economic models yield the prediction that firms should fully disclose any relevant private information that can be credibly communicated to the market (Grossman and Hart, 1980; Milgrom, 1981). Challenged by the irreconcilability of this prediction with the observed tendency of firms to withhold private information, an extensive line of research has since then examined the conditions under which it is optimal for firms not to fully disclose their private information.2 Yet, there is still little systematic evidence on the motivations for firms to engage in voluntary disclosure. Healy and Palepu (2001) list the question Why do firms engage in voluntary disclosure? as one of the fundamental unanswered issues in the literature. Our study sheds more light on this question by developing and empirically testing a framework of hypotheses on the motivations for acquiring firms to provide voluntary synergy disclosures.

See, e.g., Verrecchia (1990, 2001), Nagar (1999), Dye (2001), Einhorn (2007), and Einhorn and Ziv (2007).

7 The remainder of this article proceeds as follows. Section 1 provides the theoretical background. Section 2 describes the data set. Section 3 provides empirical results on the determinants of voluntary synergy disclosures. Section 4 describes the calculation of forecasted synergy values, and Section 5 analyzes the impact of synergy disclosure on acquiring-firm stock returns. Section 6 provides the results on the impact of synergy disclosure on the likelihood of competition and deal completion. Section 7 concludes.

1. Theoretical Background In this section, we develop the hypotheses guiding our empirical analysis of the motivations behind voluntary synergy disclosures. From these hypotheses, we subsequently derive testable predictions on the variables driving synergy disclosures, the stock price impact of synergy disclosures, and the influence of synergy disclosures on the likelihood of takeover competition and deal completion.

1.1 Hypotheses We consider the following six non-mutually exclusive hypotheses on the underlying determinants of voluntary synergy disclosures: 1.1.1 Shareholder Uncertainty hypothesis According to the models of Dye (2001) and Verrecchia (2001), the main benefit of voluntary information disclosure consists of the reduction of asymmetric information between the firm and its shareholders. When a firm announces an acquisition, there may be a substantial degree of uncertainty in the market about the value of the synergies associated with the deal (Rhodes-Kropf and Viswanathan, 2004; Officer, Poulsen, and

8 Stegemoller, 2009). Asymmetric information regarding the benefits of the deal may cause acquirer stockholders to react negatively even to positive net present value deal announcements, since they cannot distinguish between good and bad deal types (Moeller, Schlingemann, and Stulz, 2007; Officer, Poulsen, and Stegemoller, 2009). Acquiring-firm managers may therefore use voluntary synergy disclosures as a signaling tool to alleviate shareholder concerns about the value of the transaction. 1.1.2 Management Uncertainty hypothesis Next to the uncertainty of acquiring-firm shareholders, acquiring-firm managers may also be uncertain about the true value of the synergies associated with the deal. As shown in the model of Verrecchia (1990), managers incentives to voluntary disclose forecasted information should be increasing in the quality of the information available to them. The underlying intuition is that high-quality signals make it more likely that the ex-post outcome will be close to the estimated value, thus reducing the potential for reputation loss and litigation costs associated with providing unrealistic estimates.3 Based on this model, we expect acquirer managers to be more likely to provide synergy estimates when they are more certain about the value of the synergies. 1.1.3 Agency Costs hypothesis Voluntary information disclosures can be used as a mechanism to reduce agency problems between managers and shareholders (Healy and Palepu, 2001). Several authors have documented the existence of agency problems in the context of M&As (Jensen and
3

Over the past years, a number of firms have been sued for making supposedly unrealistic synergy estimates. For example, SunTrust has been sued by First Union Corp. and Wachovia. Other companies (among which Hewlett-Packard in its merger with Compaq) had to demonstrate in-court how they obtained their synergy estimates. The mere possibility of incurring legal costs resulting from the release of a synergy estimate might work as a deterrent of voluntary disclosures. Empirical evidence on the impact of voluntary disclosure on the likelihood and costs of litigation is mixed, however (Skinner, 1997; Field, Lowry, and Shu, 2005).

9 Meckling, 1976; Jensen, 1986; Morck, Shleifer, and Vishny, 1990). Stockholders may believe that certain deals are driven by management utility maximization rather than by shareholder wealth maximization, and therefore react more negatively to the deal announcement than in the absence of agency costs (Moeller, Schlingemann, and Stulz, 2005). Providing information on the synergies associated with the deal may alleviate such concerns. Alternatively, synergy disclosures may also be a manifestation of a severe agency problem present within the company. That is, self-serving managers may use inflated synergy value estimates to motivate a potentially value-destructive (empirebuilding) deal.4 Under both viewpoints, we expect voluntary synergy disclosures to be more likely for firms suffering from more severe agency problems. 1.1.4 Antitrust hypothesis Regulatory authorities are more likely to approve a deal when the expected efficiency gains offset the perceived welfare loss resulting from an increase in market power (Motta and Vasconcelos, 2005). Acquiring firms likely to face antitrust restrictions may thus use synergy disclosures as a tool to convince regulators that their planned acquisition is value-enhancing. 1.1.5 Proprietary Costs hypothesis The release of private information can damage a firms competitive position in product markets (Dye, 1986). In the context of M&As, the provision of synergy forecasts may allow competitors to infer important confidential information on the bidding firm, such as its cost structure, strategy and future position in the market, as well as on
The business press provides ample illustrations of synergy forecasts being used as cheap talk to motivate controversial deals. As argued by Warren Buffett (Berkshire Hathaway Annual Report, 1997): If a CEO is enthused about a particularly foolish acquisition, both his internal staff and his outside advisers will come up with whatever projections are needed to justify his stance. Only in fairy tales are emperors told that they are naked.
4

10 potential sources of value creation. As such, providing synergy estimates to the market may result in a substantial loss of proprietary information and attract other bidders for the same target. In line with the literature, we label the costs associated with revealing proprietary information proprietary costs. 1.1.6 Shareholder Approval hypothesis Target shareholders have the right to cast their vote on any proposed M&A deal. In certain cases, acquirer shareholders also need to approve the acquisition (Bethel, Hu, and Wang, 2009). Acquirer managers may thus use voluntary synergy disclosures as a mechanism to convince shareholders of the benefits of the deal, and as such increase the probability that the shareholders will approve the deal.5

1.2 Testable Predictions 1.2.1 Determinants driving voluntary synergy disclosures On the whole, our six hypotheses imply that bidders likelihood to provide synergy value estimates should be positively influenced by the level of shareholder uncertainty regarding the value of the synergies, the level of agency costs of the bidding firm, the likelihood of facing antitrust restrictions, and the need to obtain shareholder approval for the deal, and negatively influenced by the level of uncertainty faced by bidder management (and the costs associated with such uncertainty) as well as by the costs associated with sharing proprietary information with competitors.

This hypothesis is somewhat related to the Shareholder Uncertainty and Agency Costs hypotheses. More particularly, if synergy disclosures are able to alleviate bidder shareholder concerns about the valuecreating potential of the deal and/or the underlying management motivations, then these shareholders will also be more likely to accept the proposed transaction.

11 To test these predictions, we construct proxies for the different benefits and costs associated with voluntary synergy disclosures, and analyze whether disclosing and nondisclosing deals differ along these dimensions. The Appendix includes a detailed description of all proxy variables. We assume that shareholder uncertainty about the synergy value is more severe when deals are (partly) financed with shares of the acquiring firm. Stockholders may suspect such deals to be inspired by bidder overvaluation rather than by value-creating motives (Hansen, 1987; Travlos, 1987; Moeller, Schlingemann, and Stulz, 2007). Conversely, we expect information asymmetry about synergy values to be smaller when the deal has been preceded by a large number of other deals targeted at the same industry. Observing these previous deals could make it easier for bidder shareholders to quantify the synergy values associated with the proposed transaction. In line with Servaes and Zenner (1996), we also assume that the information asymmetry problem is smaller for deals between firms in the same industry. For such deals, it may be easier to quantify the associated synergies. To capture the uncertainty regarding synergy value faced by acquirer shareholders, we therefore include an Equity Payment dummy variable equal to one for deals (partly) financed with shares, an Industry Liquidity Index measuring the number of M&A transactions in the targets industry over the year prior to the transaction (calculated as in Schlingemann, Stulz, and Walkling, 2002), and a Same Industry dummy variable equal to one for deals between firms in the same industry. Although voluntary synergy disclosures are hypothesized to reduce asymmetric information with respect to the value of synergies rather than with respect to stand-alone company values, we also test whether the level of asymmetry information related to target and bidder values influences the disclosure

12 decision. Information asymmetry regarding the stand-alone values of the involved companies can make it harder for shareholders to evaluate the benefits resulting from combining these two entities. To measure the level of information asymmetry about firm value, we use stock return Volatility (as in Krishnaswami and Subramaniam, 1999) and Total Assets (as in Chari, Jagannathan, and Ofer, 1988). Asymmetric information should be higher for firms with a higher stock return volatility and/or a smaller size. The set of variables used to capture the uncertainty of bidder managers about the value of the synergies associated with the deal partly overlaps with that used for measuring the uncertainty faced by bidder shareholders. More particularly, we expect it to be easier for managers to obtain an accurate synergy value estimate if there have been many previous deals in the same industry, if the deal is targeted at a company in the same industry, and if there is little information asymmetry on the stand-alone value of the target. The predicted impact of the Industry Liquidity Index and Same Industry proxies, as well as of Target Volatility and Total Assets on the decision to disclose synergies thus depends on whether the acquirer managements wish to cater to shareholder information needs outweighs its fear for the potential costs associated with providing uncertain synergy estimates. As an additional measure for the level of uncertainty about synergy values faced by the acquirers management, we include a Hostile Deal dummy variable equal to one for hostile transactions. Acquirer management often has no access to the target firms books in hostile deals, which makes it harder to calculate the value of potential synergies. We also include a dummy variable equal to one for firms domiciled in Delaware. Delaware companies tend to face smaller legal transaction costs and less uncertainty regarding legal outcomes, due to a number of institutional characteristics of

13 that state (Romano, 1985; Daines, 2001). As a result, Delaware company managers may be less concerned about potential shareholder litigation costs associated with synergy forecasts, resulting in a higher likelihood of synergy disclosures. To capture agency costs between acquirer managers and shareholders, we include a number of standard measures. In line with earlier studies (see, e.g., Jensen and Meckling, 1976; Jensen, 1986; Gompers, Ishii, and Metrick, 2003), we assume that agency problems are more severe for acquirers with high Free Cash Flow (FCF) and poor corporate governance quality (as proxied by a high Gompers, Ishii, and Metrick (2003) (GIM) Index), and less severe for acquirers with high Leverage and a high percentage of Institutional and/or CEO Ownership. To test the validity of the Antitrust hypothesis, we include the acquiring-firm industrys Concentration Ratio, as well as a dummy variable equal to one for deals between firms in the Same Industry. M&As initiated by firms active in concentrated industries may be motivated by market power rather than by value creation considerations, which could increase the need to use synergy disclosures to convince authorities of the synergies associated with the deal. A similar reasoning holds for intraindustry deals. As proprietary costs proxies, we include the Concentration Ratio of the industry in which the bidder operates, as well as the Target and Acquirer Market to Book ratio. According to Bamber and Cheon (1998), a firm active in more concentrated industries and/or with more growth opportunities (higher Market to Book ratio) should be less willing to disseminate information that could lead to more competition. We also control for Target and Acquirer Research and Development (R&D) expenses. Higher R&D

14 potentially reflects a higher level of investment in firm-specific (innovative) processes (Mizik and Jacobson, 2003), and thus a higher level of proprietary costs resulting from voluntary information disclosure. To capture the need for shareholder approval, we include a Need for Shareholder Approval dummy variable equal to one if acquirer shareholders have to approve the deal. This is the case if the deal is financed with shares equivalent to at least 20% of the total number of pre-merger shares (Bethel, Hu, and Wang, 2009). We also control for the Takeover Premium, since the payment of a higher premium could make it more necessary for acquirer management to motivate the benefits of the deal to its shareholders. We also assume that the need to convince target-firm shareholders is higher in Tender Offers and in deals that are (partly) financed with equity. In tender offers, information on synergies allows target shareholders to better analyze the attractiveness of the offer and to infer the fraction of the total value creation that is accruing to them. In (partly) equity-financed deals, target shareholders future wealth is directly related to the combined firms value, which potentially makes the disclosure of synergy values more relevant than in cashfinanced deals. 1.2.2 Impact of voluntary synergy disclosures on acquirer stock returns Numerous event studies show that acquirer stock prices tend to decrease upon merger announcements (e.g., Morck, Shleifer, and Vishny, 1990; Andrade, Mitchell, and Stafford, 2001; Moeller, Schlingemann, and Stulz, 2005). The Shareholder Uncertainty, Management Uncertainty and Agency Costs hypotheses all yield the prediction that voluntary synergy disclosures should have a positive impact on acquirer stock price reactions, ceteris paribus, while the other hypotheses yield no

15 direct predictions on the relation between synergy forecasts and stock returns. According to the Shareholder Uncertainty hypothesis, acquirer managers use voluntary synergy disclosures to alleviate shareholder concerns about the value of the synergies associated with the deal. If this adopted strategy is successful (i.e., if shareholders think the forecasted information is credible), then this should result in more favorable acquirer stock returns upon the deal announcement, ceteris paribus. The Management Uncertainty hypothesis asserts that managers only disclose synergy forecasts when they are relatively certain of the synergies created by a deal. If this is the case, then stockholders may interpret the disclosure of a synergy forecast as a signal of managerial confidence in the quality of the acquisition, which should again result in more positive stock price reactions for disclosing deals. According to the Agency Costs hypothesis, bidder management uses synergy forecasts to convince shareholders that the deal is motivated by value creation rather than by management self-serving behavior. If this is successful, then we should observe more favorable acquirer shareholder reactions to M&As announced by synergydisclosing acquirers. If the information embedded in the synergy forecasts is at least partly credible, then the magnitude of acquiring-firm stock returns should also be increasing in the fraction of the synergies that effectively accrues to the acquiring-firm shareholders, as measured by the difference between the present value of the synergies and the takeover premium. 1.2.3 Impact of voluntary synergy disclosures on the likelihood of competition for the target firm To obtain more insight into the motivations for firms to engage in voluntary synergy disclosures, we analyze whether these disclosures result in a higher likelihood of

16 attracting competition for the target firm. According to the Proprietary Costs hypothesis, information on synergies may enable competitors to understand how much the original bidder is willing to pay for the target. This information could enable free-riding competitors to enter a takeover contest in an advantageous position, provided that they are able and willing to pay at least as much. The Proprietary Costs hypothesis thus predicts a positive impact of synergy disclosures on the likelihood of takeover competition for the target. The other hypotheses yield no prediction on the relation between synergy disclosures and competition. 1.2.4 Impact of voluntary synergy disclosures on the likelihood of deal completion A fraction of announced M&A deals never reach completion. For example, Officer (2003) documents that 16% of announced M&A transactions are subsequently withdrawn. The Antitrust and Shareholder Approval hypotheses imply, respectively, that acquirers use synergy disclosures to increase the likelihood of antitrust authority and shareholder approval of the deal. As such, both these hypotheses predict a positive impact of synergy disclosures on the probability of deal completion. Table 1 summarizes our hypotheses on the underlying motivations for voluntary synergy disclosures and the associated testable predictions.

[Please insert Table 1 about here]

2. Data We obtain a sample of mergers and acquisitions between U.S. public firms announced between January 1st 1995 and December 31st 2008 from the Securities Data Companys

17 Mergers and Acquisitions Database (henceforth SDC). We exclude minority stake repurchases, acquisitions of remaining interest by majority owners, privatizations, leveraged buyouts, spinoffs, recapitalizations, self tenders, exchange offers, and repurchases. We also exclude utilities (SIC codes starting with 49) because these firms may have to pass on part of the synergies to their consumers and as such have different incentives for synergy disclosures (Seshadri et al., 2007). In line with Betton, Eckbo, and Thorburn (2009a), we eliminate deals involving target firms with a share price below one dollar 22 trading days before the offer is publicly announced. We require that all necessary accounting data for both bidder and target are available in the Compustat Fundamentals Annuals database, and that stock price information for bidder and target is available in the Center of Research in Security Prices (CRSP) database. Our final sample consists of 1,770 M&A transactions, of which 1,537 are completed deals. We obtain deal-related data from SDC, institutional ownership information from the Thomson Reuters CDA/Spectrum s34 database, and executive compensation information from Execucomp. Following Ali, Klasa, and Yeung (2009), we obtain industry concentration ratios from the U.S. Census. All explanatory variables are winsorized at the 1% and the 99% level to reduce the influence of outliers. To identify bidding firms releasing synergy forecasts, we search the Factiva database for all newspaper articles and press releases related to the acquiring firm on the deals announcement date (retrieved from SDC), as well as on the preceding and following five trading days. We verify that the synergy forecast is provided by a chief executive of the acquiring firm, not by other parties such as analysts or journalists. We identify 315

18 disclosing deals. In all disclosing deals, the synergy forecast is released on the same date as the announcement of the deal (i.e., either together with the announcement, or a few hours later). In the vast majority of cases (88%), the disclosure of synergies is included in a news article or press release issued by the acquiring firm. In the remaining 12% of the observations it is announced in a conference call and then reproduced by the media. Table 2 shows that the use of voluntary synergy disclosures has increased over time. While in 1995 only 7% of the deals are accompanied by a synergy forecast, in 2008 this percentage amounts to 29%. Deals with disclosed synergy values account for 42% of the total deal value between 1995 and 2008.

[Please insert Table 2 about here]

3. Determinants of Synergy Disclosures In this section, we test our predictions on the variables driving the synergy disclosure decision. Table 3 provides the result of a univariate comparison of potential synergy disclosure determinants between disclosing and non-disclosing deals.

[Please insert Table 3 about here]

The univariate analysis uncovers several significant differences between disclosing and non-disclosing deals. Consistent with the Shareholder Uncertainty hypothesis, we find that disclosing deals are more likely to be financed with equity. Inconsistent with this hypothesis, however, synergy-disclosing acquirers have a smaller Volatility and larger

19 Total Assets, suggesting that there is less information asymmetry regarding their standalone value. Also inconsistent with the Shareholder Uncertainty hypothesis, but in line with the Management Uncertainty hypothesis, disclosing deals are more likely to involve Same Industry companies, and tend to involve targets with smaller Volatility and larger Total Assets. The finding that disclosing acquirers are more likely to be domiciled in Delaware than non-disclosing acquirers is also in line with the Management Uncertainty hypothesis. Evidence for the Agency Costs hypothesis is mixed. Consistent with this hypothesis, disclosing acquirers have smaller CEO Equity Ownership, but inconsistent with this hypothesis disclosing acquirers have higher Leverage and Institutional Ownership. In line with the Antitrust hypothesis, the disclosing sample includes a significantly higher portion of Same Industry deals. There are no significant differences in Acquirer Concentration Ratios between the disclosing and non-disclosing subsamples, however. Consistent with the Proprietary Costs hypothesis, disclosing deals involve targets and acquirers with smaller Market to Book ratios, and acquirers with smaller R&D expenses. Finally, consistent with the Shareholder Approval hypothesis, disclosing deals tend to have a higher portion of Equity Payment and a smaller Takeover Premium, and are more likely to require acquiring-firm Shareholder Approval. The negative coefficient on the Tender Offer dummy variable is inconsistent with this hypothesis, however. On the whole, we can conclude that the univariate results provide mixed evidence for our different hypotheses on the determinants of synergy disclosures. We subsequently analyze whether these univariate results hold in a multivariate setting by conducting a probit analysis with a Synergy Disclosure dummy variable equal

20 to one for disclosing deals as dependent variable. Table 4 presents the results. All regressions reported throughout the paper include industry and year fixed effects. zstatistics are based on standard errors robust to industry clustering. Model (1) does not include Acquirer CEO Ownership and GIM Index, since these variables are available for less than half of the observations. Model (2) includes the full set of potential determinants outlined in Table 1.

[Please insert Table 4 about here]

In line with the Shareholder Uncertainty hypothesis, the results show a positive impact of Equity Payment (only significant in Model (1)) and a negative impact of Acquirer Total Assets on the likelihood of voluntary synergy disclosures.6 Inconsistent with the Shareholder Uncertainty hypothesis, Acquirer Volatility has a significant negative coefficient in Model (1). Also inconsistent with the Shareholder Uncertainty hypothesis, but in line with the Management Uncertainty hypothesis, we find a positive influence of the Industry Liquidity Index, Target Total Assets, and the Same Industry dummy variable (only significant in Model (2)), and a negative impact of Target Volatility (only significant in Model (2)) on the disclosure decision. Also in line with the Management Uncertainty hypothesis, voluntary synergy disclosure is significantly less likely for Hostile Deals. Together, these results suggest that, in situations in which both acquirer managers and shareholders face high uncertainty about synergy values, managements concerns for the
We include the natural logarithm of Total Assets in the regression analyses to allow for a non-linear impact of firm size.
6

21 costs associated with providing uncertain synergy estimates tend to outweigh their incentive to cater to their shareholders information needs. In other words, when acquirer managers have difficulties providing an accurate synergy estimate, they prefer playing safe over trying to bridge the information gap with their shareholders. This conclusion does not mean that acquirer managers are insensitive to the information needs of their shareholders. To the extent that these information needs are more prevalent for equityfinanced deals and for deals made by smaller acquirers, our findings suggest that managers do take shareholder concerns about the value of the deal into account in their decision to disclose synergies (positive impact of Equity Payment, and negative impact of the logarithm of Acquirer Total Assets). The probit results provide limited support for the Agency Costs hypothesis. CEO Ownership has the expected significantly negative regression parameter in Model (2), but none of the other agency costs proxies is statistically significant in either of the models. Consistent with the Antitrust hypothesis, we find a significant positive impact of the Acquirer Concentration Ratio and the Same Industry dummy variable (the latter only significant in Model (2)). We find mixed evidence for the Proprietary Costs hypothesis. The negative impact of Acquirer Market to Book ratio and Target R&D is consistent with this hypothesis, but the positive coefficient of the Target Market to Book ratio goes against this hypothesis. Consistent with the Shareholder Approval hypothesis, the Need for Shareholder Approval dummy variable (Takeover Premium) has a positive (negative) coefficient (albeit only statistically significant in Model (1)). The positive influence of the Equity Payment dummy variable on the synergy disclosure decision is also in line with the Shareholder Approval hypothesis.

22 4. Synergy Value Calculation As outlined earlier, the Shareholder Uncertainty, Management Uncertainty, and Agency Costs hypotheses imply that acquirers stock returns will be (i) higher for disclosing deals, ceteris paribus, and (ii) increasing in the fraction of synergies accruing to acquirer stockholders. Prior to testing these predictions in the next section, in this section we first outline how we calculate the present value of the forecasted synergies, and how we construct our measure for the fraction of the synergy value accruing to bidder shareholders.

4.1 Present value of forecasted synergies To calculate the present value of the forecasted synergies, we manually collect detailed synergy information (i.e., source of the synergy, value, and timing) for each of the 315 disclosing deals.7 In line with other studies (Houston, James, and Ryngaert, 2001; Bernile and Bauguess, 2010), we find that the reported synergies mainly result from costs savings. In only 14% of the observations the estimates of the synergy include forecasts of revenue enhancements as a result of the merger. On average, these revenue enhancements amount to 40% of the total disclosed synergy value. We adjust all disclosed values to after-tax figures by applying a 35% statutory federal tax rate over corporate income. A small fraction (15%) of the synergy forecast announcements include a range of synergy values. In such cases, we use the ranges midpoint in subsequent analyses. We account for the forecasted timing of the synergy-related cash flows by following the procedure outlined in Houston, James, and Ryngaert (2001). In 62% of the

Our sample contains only two cases in which management directly reports the present value of the synergies. In these cases, we use the managerial estimate as such, without further adjustments.

23 observations, managers use a specified projection horizon for the yearly synergy estimates. If managers do not mention what happens in intermediate years, we assume a linear increase in the level of the synergies between the disclosure date and the year in which the managers projection ends. For example, in the acquisition of Merrill Lynch by Bank of America announced in 2008, the latter firm mentions that it expects to achieve $7 billion in yearly pre-tax expense savings, fully realized by 2012. In this case, we project (pre-tax) cash flows of $1.75 billion in 2009, $3.5 billion in 2010, $5.25 billion in 2011, and $7 billion in 2012. We assume that all cash flows occur at year-end. In cases in which the managers do not specify in which year they expect the full synergies to be attained (37% of the observations), we assume that the synergies are fully achieved at the end of the following calendar year. An example is the merger between SCI Systems and Sanmina announced in 2001, in which the management discloses that the two companies expect $100 to $150 million in cost savings without providing a more detailed projection horizon. In our calculations, we project a cash flow of $125 million at the end of 2002. We assume that, after the projection horizon, the value of the synergies grows at the expected long-term inflation rate prevailing at the time of the announcement of the deal. We obtain this rate from the Federal Reserve Bank of Philadelphia. Following Kaplan and Ruback (1995) and Houston, James, and Ryngaert (2001), we use the cost of equity of the acquiring firm as a discount factor for calculating the present value of the forecasted cash flows.8 We calculate this cost of equity by multiplying the

To obtain a more precise estimate of the total synergies, we should subtract the integration costs forecasted by managers. However, these costs are not disclosed in 77% of the observations. We do not expect the non-inclusion of these costs to materially affect the results, given the small values usually forecasted for restructuring charges. For example, Houston, James, and Ryngaert (2001) find that average integration costs amount to only 1% of the combined bidder and target equity values in their sample of bank mergers.

24 firms adjusted market beta (computed using daily stock returns over a period of one year prior to the announcement of the deal) by a 7% risk premium, and adding the yield on a ten-year U.S. Treasury Bond at the time of the announcement (obtained from Datastream).9

4.2 Fraction of forecasted synergies accruing to acquirer shareholders To measure the fraction of synergies accruing to acquirer shareholders, we subtract the aggregate takeover premium paid by the bidder expressed in U.S. dollars from the present value of the forecasted synergies, and scale the result by the acquiring-firms equity market value.10 By subtracting the takeover premium from the estimated synergies, we remove the portion of the synergies that accrues to target shareholders. We label the resulting ratio Synergy Ratio. Surprisingly, we find that both the average and the median values of the Synergy Ratio variable for disclosing deals are negative (0.89% and 0.32%, respectively), albeit not statistically different from zero. In more than half of the observations (54%), the takeover premium offered is higher than the value of the announced synergies. This observation is puzzling and warrants further analysis. We start by verifying whether this unexpected result is due to any specific characteristics of our sample or measurement procedure. To facilitate comparison with

The adjusted market beta corrects for the mean-reversion tendency observed in market betas (Blume, 1975). It is calculated as 0.333 plus the historical market beta multiplied by 0.666. 10 We calculate the takeover premium in dollars by multiplying the percentage takeover premium with the target market capitalization measured four days prior to the takeover announcement. Following Officer (2003), we first compute the percentage premium using the pay components reported by SDC. If this value is lower than zero or higher than two, we instead use the premium using the initial price of the offer as reported in SDC. In line with Officer (2004), we measure the equity market value four trading days prior to the announcement. Results are robust if we measure the market value 22 trading days prior to the announcement instead.

25 other studies, we scale the synergy forecast by the combined bidder and target market capitalization. In our sample, the average (median) synergy estimated by the managers is 10.23% (6.43%) of the combined bidder and target market capitalization. These percentages are of the same order of magnitude as projected synergy forecasts reported by Houston, James, and Ryngaert (2001) and Bernile and Bauguess (2010). Our synergy valuation procedure thus seems to produce reasonable estimates. The large portion of deals with a reported synergy value lower than the premium paid does not seem to be attributable to excessively high takeover premiums either. The average (median) takeover premium for disclosing deals is 44.50% (35.26%), while Officer (2003) obtains an average (medium) premium of 55% (48%) following the same methodology. We also test the sensitivity of the calculated Synergy Ratio to the use of different assumptions for growth and discount rates, and to the use of different takeover premium measures. The fraction of deals with reported synergies lower than the premium is virtually unaffected by a change of these parameters within reasonable bounds. Having ruled out these explanations, we formally analyze the determinants driving low-synergy disclosures by estimating a probit regression with a Low Disclosed Synergy dummy variable equal to one for disclosing deals in which the present value of forecasted synergies scaled by the takeover premium is smaller than the bottom-third of the value of this ratio for the whole sample (62.75%), and equal to zero for other disclosing deals. We hypothesize that Low Disclosed Synergy deals may be characterized by high potential shareholder litigation costs associated with providing too high synergy forecasts, causing managers to provide very conservative estimates. We include the Delaware dummy variable described earlier as an inverse proxy for expected shareholder

26 litigation costs in the probit analysis. Table 5 presents the probit results. We find that bidders involved in Low Disclosed Synergy deals are significantly less likely to be domiciled in Delaware, ceteris paribus, suggesting that the decision to disclose low synergies may indeed by influenced by fear for shareholder litigation costs. We identify and analyze four additional reasons for managers to disclose synergies lower than the takeover premium paid. First, these deals may be characterized by a high level of shareholder uncertainty regarding the synergy value. If the market has very little understanding of the synergies that can be created in a deal, it may react overly negative upon the deal announcement. In such cases, disclosure of low synergies may be better than outright non-disclosure, as the low synergy values may still be higher than the synergies expected by the market. To capture shareholder uncertainty about synergy value, we use the proxies described earlier. In line with this explanation, we find a significant positive coefficient for the Equity Payment dummy variable in the probit analysis. However, we also find a significant positive impact of the Industry Liquidity Index, which is inconsistent with this explanation. Low-synergy announcements may also be made by acquirers with high agency costs. Managers of such firms may use voluntary synergy disclosures as a way to partly correct the pessimistic market expectations on the value-enhancing potential of the deal (i.e., again, the low forecasted synergies may still be higher than the synergy value expected by the market). To test this explanation, we include a number of agency costs proxies specified earlier.11 Apart from Institutional

We omit Acquirer CEO Ownership and GIM Index since the inclusion of these variables would reduce the number of observations too drastically.

11

27 Ownership (which has a counterintuitive positive parameter), none of these proxies has a significant coefficient in the probit results.12 A third potential explanation is that the low synergy disclosure deals are aimed at highly undervalued target firms. In those cases, the acquirer may offer a premium higher than the forecasted synergies to capture part of the undervaluation of the stand-alone value of the target. To measure target undervaluation, we decompose the targets Market to Book ratio into three components following the procedure outlined in Rhodes-Knopf, Robinson, and Viswanathan (2005). A first component measures firm-specific overvaluation, a second component industry-wide overvaluation, and a third component the long-run pricing-to-book value. Inconsistent with this explanation, we find that Target Firm-Specific Overvaluation has a significant positive regression parameter in the probit analysis. Finally, the low-synergy announcements may be inspired by strategic considerations. As suggested by Dye (2001), acquirers with high proprietary costs may strategically report lower-than-expected information to pre-empt competitors from competing for the same target (or for other targets in the same industry). For such acquirers, the benefit of scaring away competitors may outweigh the cost of announcing synergies lower than the takeover premium. We examine this explanation by using the proprietary costs proxies specified earlier, except for Target Market to Book (since we use a decomposition of this ratio to test the undervaluation hypothesis). None of these proxies are significant.

To the extent that higher Institutional Ownership increases the likelihood of concerted legal actions if projected synergy values turn out to be lower than expected, its positive coefficient provides additional evidence for the impact of litigation costs on the low synergy disclosures.

12

28 We thus conclude that we find some evidence that low-synergy announcements are influenced by litigation costs and shareholder uncertainty about synergy values, while other explanations do not seem to hold. The finding that litigation costs influence the forecasted synergy amount suggests that some synergy forecasts may be lower than the actual synergy value expected by managers.13

[Please insert Table 5 about here]

5. Impact of Synergy Disclosures on Acquirer Stock Returns To the extent that voluntary synergy disclosures alleviate asymmetric information problems, signal managerial confidence in the deal quality, and/or suggest that the deal is not driven by management self-serving behavior, we expect acquirer stock price reactions to be more positive for disclosing deals, ceteris paribus. We measure cumulative abnormal stock returns (CAR) using the market model based on the CRSP valueweighted index over the period [1, +1] relative to the deals announcement date (obtained from SDC). The estimation period ranges from trading days 243 to 43. To mitigate the effect of different probabilities of deal completion on abnormal returns, we only include completed deals in the event-study analysis We find that the average (median) CAR associated with the announcement of disclosing deals is 2.60% (1.88%), while the average (median) CAR associated with the announcement of non-disclosing deals is 1.97% (1.13%). The differences in CARs

13

In line with this intuition, some M&A announcements state that managers expect synergies to be at least the number they disclose. For example, the announcement by Chevron of its merger with Texaco includes the following statement (Dow Jones News Service, 16/10/2000): Chevron expects the strategic compatibility of the companies to result in rapid integration and the achievement of annual savings of at least $1.2 billion within six to nine months of the merger's completion.

29 between both subsamples are not statistically significant (t-statistic for differences in means equals 1.22).14 This result does not necessarily imply that voluntary synergy disclosures have no impact on bidder stock returns. As documented earlier, characteristics of disclosing deals are substantially different from those of non-disclosing deals. If we want to obtain a clean estimate of the impact of synergy disclosure on stock returns, we need to control for these differences. We therefore regress acquirer CARs on the Synergy Disclosure and Synergy Ratio variables defined earlier, while controlling for a number of acquirer stockholder reaction determinants suggested by the literature (Travlos, 1987; Morck, Shleifer, and Vishny, 1990; Moeller, Schlingemann, and Stulz, 2004; Masulis, Wang, and Xie, 2007; Betton, Eckbo, and Thornburn, 2009b; Kisgen, Qian, and Song, 2009). The Synergy Disclosure dummy captures the discrete decision of releasing a synergy forecast, while the Synergy Ratio captures the magnitude of the forecasted synergies that accrue to bidding-firm shareholders. The Appendix includes a detailed definition of all explanatory variables.

[Please insert Table 6 about here]

Model (1) of Table 6 shows the OLS regression results. Inconsistent with our prediction, we find that the coefficient of the Synergy Disclosure dummy variable is not statistically significant. However, one concern with the current model specification is that unobserved deal or firm characteristics may have an impact both on the decision to

In an unreported analysis, we calculate the announcement returns for deals with announced synergies smaller than the takeover premium. As expected, we find that these low synergy deals have significantly smaller announcement returns than other disclosing deals (4.16% versus 0.80% on average; difference significant at the 1% level).

14

30 disclose and on bidder CARs. Such endogeneity problem would cause the error terms of the probit analysis and the CAR analysis to be correlated, leading to biased inferences on the impact of synergy disclosures on stock returns. To correct for this potential bias, we use a two-step Heckman (1979) estimation procedure, as in Campa and Kedia (2002) and Kisgen, Qian, and Song (2009) (among others).15 In the first step, we run the probit regression on the decision to disclose using the explanatory variables specified in Model (1) of Table 4. From the probit results we derive a hazard rate (also called Inverse Mills ratio), and include this ratio in the second-stage regression on the bidder CAR. The inclusion of the Inverse Mills ratio controls for the correlation between the error term in the probit regression and the CAR regression, thus allowing us to estimate the CAR regression as a simple OLS model. We adjust standard errors following the lines of Greene (2003).16 Model (2) of Table 6 reports the results of the second-stage OLS regression. The Synergy Disclosure dummy now has a significantly positive regression coefficient. Thus, once controlled for the endogeneity of the disclosure decision, the market does react more positively to disclosing deals. This finding is consistent with the Shareholder Uncertainty, Management Uncertainty, and Agency Costs hypotheses. The coefficient on the Inverse Mills ratio is significantly negative, suggesting that unobservable characteristics inducing bidders to disclose synergies (positive error term in

We also execute the acquirer returns analysis using maximum likelihood estimation instead of the twostep Heckman (1979) procedure. Our results remain similar in nature. 16 Since we could not identify a usable instrumental variable that influences the decision to disclose synergies without affecting acquirer abnormal returns, we rely on the non-linearity of the inverse Mills ratio for identification purposes (see Li and Prabhala, 2007 for a detailed discussion of this approach).

15

31 the probit analysis) have a negative impact on bidder stock returns (negative error term in the CAR analysis).17 As predicted, we find that acquirer stock returns are significantly positively influenced by Synergy Ratio in both regression specifications, suggesting that investors consider the disclosed synergy amount to be value-relevant and (at least partly) credible. However, the impact of the Synergy Ratio on bidder stock returns is quite small in percentage terms (regression coefficient of approximately 10%). In Table 7, we examine the robustness of the observed Synergy Ratio coefficient to a number of alternative regression specifications. The regressions incorporate the same control variables as in Model (2) of Table 6. In Model (1) of Table 7, we obtain a similarly low capitalization percentage (coefficient on the Synergy Ratio of 0.11) if we only include disclosing deals in the analysis. In Model (2), we replace the Synergy Ratio by the synergy measure used by Houston, James, and Ryngaert (2001), i.e., the ratio of the forecasted synergies to the acquirer equity market value. Unlike the Synergy Ratio, this ratio does not control for the takeover premium paid. We find that the coefficient on this measure is even smaller in size (0.031) and not statistically significant.

[Please insert Table 7 about here]

Given the probit results discussed earlier, we conjecture that these unobservable factors could represent characteristics linked to shareholder uncertainty with respect to the value of the deal that are not captured in the model. That is, higher shareholder uncertainty results in a higher likelihood of synergy disclosure (ceteris paribus), and at the same time in more negative acquirer returns, hence the need for the use of synergy disclosures as an offsetting signaling mechanism.

17

32 We explore several explanations for the small capitalization percentage of the forecasted synergies in acquiring-firm stock prices. As argued by Patell (1976), the extent to which the information embedded in voluntary managerial disclosures is capitalized into stock prices depends on the surprise factor in the information. If the market can easily anticipate the disclosed value using publicly available information, then it is normal to observe a small stock price impact upon disclosure of the forecast. To assess the degree to which managerial synergy value disclosures effectively represent new information to the market, we regress the Synergy Ratio on a set of explanatory variables that may influence the magnitude of the announced synergies. We obtain an R-square of 58.60% for this model (untabulated). In Model (3) of Table 7, we regress acquiring-firm CARs on the residual value of this regression analysis, which is used as a measure for the unpredicted component of the synergies accruing to acquirer shareholders. The regression does not include control variable since this would cause estimation problems. We find that the coefficient on this surprise component is of the same order of magnitude as the coefficient on the unadjusted Synergy Ratio (0.11). Thus, the small capitalization percentage of the Synergy Ratio does not seem to be attributable to market anticipation of the forecasted synergies. We also examine whether the markets failure to capitalize around 90% of the forecasted synergy information may be attributable to an irrational investor underreaction to this information. Previous studies have shown evidence of an initial market underreaction to information on intangible assets such as R&D and advertising (Chan, Lakonishok, and Sougiannis, 2001) and employee satisfaction (Edmans 2010). Lev (2004) and Edmans (2010) attribute these findings to the fact that investors may need

33 time to fully grasp the (tangible) benefits associated with the intangible assets. Similarly, given the uncertainty associated with forecasted synergies, investors may be slow to realize the implications of a given synergy announcement for future expected cash flows. If this explanation holds, then we should observe a stronger impact of the Synergy Ratio on CARs measured over an extended window after the deal announcement. In Models (4) and (5) of Table 7, we test this prediction by examining CARs over the windows [1, 10] and [1, 20] following the M&A deal announcement. We find that the coefficient on the Synergy Ratio only marginally increases (to 0.13 and 0.15, respectively). In an untabulated analysis, we also examine stock returns over longer windows following the deal announcement. Using a calendar-time portfolio approach (Fama, 1998), we build equally- and value-weighted monthly-rebalanced portfolios long in stocks of disclosing firms and short in stocks of non-disclosing firms, and regress one-year, two-year and three-year returns over these portfolios on the three Fama-French (1993) factors and a Carhart (1997) momentum factor.18 We find no evidence that disclosing deals significantly outperform non-disclosing deals (alphas of the constructed long-short portfolios are always insignificant, and vary between 0.001 and 0.002). Thus, announcement-period acquirer stock returns seem to capture the full impact of the synergy disclosure. As suggested by Healy and Palepu (2001), an explanation for the small capitalization factor of the disclosed information may be market uncertainty regarding the accuracy of the managerial forecast. Such uncertainty may induce stockholders to place a large discount on the disclosed managerial forecast.

18

All factors are gathered from Kenneth Frenchs website.

34 With respect to the control variables, we find that acquirer stockholder reactions are more negative for deals with higher asymmetric information about the deal value and/or the stand-alone value of the bidder (negative impact of Equity Payment and Acquirer Volatility, and positive impact of Acquirer Total Assets). This result is in line with findings reported by Moeller, Schlingemann, and Stulz (2005, 2007). A priori, we also expect a negative impact of proxies for the level of asymmetric information on the target stand-alone value, but we find no evidence for this prediction in the results (the impact of Target Total Assets, which acts as an inverse proxy for the information asymmetry on the target stand-alone value, is actually significantly negative). Results with respect to the other control variables are largely consistent with the literature.

6. Impact of Voluntary Synergy Disclosures on Takeover Competition and Deal Completion To examine the impact of synergy disclosures on the likelihood of competition for the target firm, we scan SDC for subsequent offers for the same target taking place within one year of the initial bid. We construct a Competing Offer dummy variable equal to one for deals for which is the case, and equal to zero otherwise. Within the synergy-disclosing subsample, we find that 6.67% of the targets receive a competing offer. In the nondisclosing subsample, this percentage is significantly smaller (3.85%; 2-statistic for difference in proportions is significant at less than 1%). Obviously, this observed difference in competition could be driven by differences in firm- or deal-related characteristics unrelated to the synergy disclosure decision. We therefore conduct a probit analysis in which we regress the Competing Offer dummy variable on the Synergy

35 Disclosure dummy variable, as well as a set of control variables largely based on Officer (2003). Model (1) of Table 8 provides the results.

[Please insert Table 8 about here]

We find no significant impact of synergy disclosures on the likelihood of attracting a competing offer. The results on the control variables suggest that competition is more likely for targets with larger Total Assets, for Hostile Deals and Tender Offers, and for deals that require Shareholder Approval, and less likely when the acquirer has a high Market to Book ratio. As the decision to disclose synergies is non-random, the coefficient on the Synergy Disclosure dummy variable may be affected by an endogeneity bias. Model (2) therefore provides the results of an instrumental variable probit analysis, in which Synergy Disclosure# represents the fitted value of a regression of the decision to disclose on the explanatory variables included in Model (1) of Table 4.19 Standard errors are adjusted following the lines suggested by Maddala and Lee (1976). Again, we do not find a significant impact of the Synergy Disclosure dummy variable. We can thus conclude that we obtain no evidence on our testable prediction on the impact of synergy disclosures on target competition derived from the Proprietary Costs hypothesis. To examine the impact of synergy disclosure on the likelihood of deal completion, we follow a similar procedure. We construct a Completed Deal dummy variable equal to one for deals classified as Completed by SDC, and equal to zero otherwise. The proportion of completed deals is not significantly different across the disclosing and non-disclosing

The instrumental variables used in the model are Acquirer and Target Volatility and R&D, the Delaware dummy variable, and Acquirer FCF, Leverage, Institutional Ownership, and Concentration Ratio.

19

36 subsamples (87.62% compared with 87.15%). Models (1) and (2) of Table 9 present the results of a standard and instrumental probit regression of the Completed Deal dummy variable on Synergy Disclosure and Synergy Disclosure#, respectively. The instruments used are the same as in Model (2) of Table 8. The set of control variables is largely based on Bates and Lemmon (2003) and Kisgen, Qian, and Song (2009).

[Please insert Table 9 about here]

Inconsistent with the predictions derived from the Antitrust and Shareholder Approval hypotheses, the results suggest that the disclosure of synergy forecasts does not significantly affect the likelihood of success of the deal. This conclusion holds independent of whether we control for endogeneity of the disclosure decision. With respect to the control variables, we find a positive impact of Acquirer Total Assets, Takeover Premium, Tender Offer, and the presence of Target Termination Fees, and a negative impact of Target Total Assets, Hostile Deal, and the Competing Offer dummy on the likelihood of successful deal completion.

7. Conclusions We examine the underlying motivations of voluntary managerial synergy disclosures by analyzing the determinants of the disclosure decision, as well as the impact of synergy disclosure on acquirer stock returns and on the likelihood of takeover competition and deal completion.

37 Overall, our results suggest that asymmetric information is the main driving force behind the decision to release synergy estimates. Our analysis of the determinants of the synergy disclosure decision reveals that managers are more prone to disclose synergies in deals financed with equity. Such deals may raise stronger shareholder concerns about the deal value (i.e., stockholders may suspect that the deal is driven by bidder overvaluation rather than by value creation motives), causing managers to use synergy disclosures as an offsetting signaling tool. We also find that acquirer management uncertainty about synergy values plays a key role in the synergy disclosure decision. Acquirer managers tend to refrain from providing a synergy estimate when their own uncertainty on the synergy value is high, potentially leading to a too high risk of reputation loss and/or litigation costs when the realized synergies turn out to be lower than predicted. As a consequence, when managers do decide to disclose synergies, this decision acts as a signal of their confidence in the quality of the deal and in the accuracy of their estimates. Our analysis of acquirer stock price reactions indicates that the signaling mechanism is effective: ceteris paribus, stockholders react positively to the disclosure of synergies. Furthermore, consistent with view that the information disclosed is value-relevant, the stock price reaction is increasing in the fraction of forecasted synergies that accrues to the acquiring-firm shareholders.

38 Appendix
This Appendix provides a definition of the explanatory variables used in the paper, listed in alphabetical order. # indicates a Compustat data item. Variable name CEO Ownership Concentration Ratio Calculation Percentage of shares owned by the companys CEO in the year prior to the announcement of the deal (obtained from Execucomp). Four-firm concentration ratio obtained from U.S Census data based on the 4-digit NAICS code of the firm (obtained from SDC). We use the census of 2002 for the period 2000-2008 and the census of 1997 for the period 1995-1999. We take the changes in NAICS codes between the 1997 and the 2002 Census into account, as SDC reports the most recent NAICS code. We measure the Acquirer Concentration Ratio using a four-firm concentration measure from the U.S. Census rather than the Herfindahl index commonly used in the literature, due to the restriction of the latter to manufacturing industries. Dummy variable equal to one for firms incorporated in Delaware (obtained from SDC). Dummy variable equal to one if the deal is (partly) financed with equity (obtained from SDC). Operating income before depreciation (#OIBDP) minus interest (#XINT), income tax (#TXT) and capital expenditures (#CAPX), scaled by book total assets (#AT), measured at the year-end before the acquisition announcement. Indicates by how much the firm is overvalued compared to its industry (Rhodes-Kropf, Robinson, and Viswanathan, 2005). It is calculated as the market value of assets minus the predicted market value of assets applying time-varying industry multiples to the firm's book value of assets (#AT), net income (#NI), and leverage ratio. The leverage ratio is equal to current liabilities (#DLC) plus total long-term debt (#DLTT), divided by total book assets (#AT). The market value of assets is calculated as the market value of equity (measured with CRSP data at the end of the year prior to the announcement of the deal) plus the book value of assets (#AT) minus the book value of equity (#CEQ) minus deferred taxes (#TXDB). Gompers, Ishii, and Metrick (GIM) (2003) governance index, which acts as an inverse proxy for the level of shareholders rights at a given firm. Obtained from the Investor Responsibility Research Center (IRRC), and measured at year-end before the deal announcement. If the GIM index value is missing for a given year, we take the value of the previous year that is covered.

Delaware Equity Payment FCF

Firm-Specific Overvaluation

GIM Index

39 Appendix (Continued)
Hostile Deal Industry Liquidity Index Dummy variable equal to one if the bid is coded as hostile/unsolicited by SDC. Measured as in Schlingemann, Stulz, and Walkling (2002). We collect all corporate transactions at the three-digit SIC code level for each sample year from SDC. The industrys liquidity index is the ratio of the value of corporate control transactions in a year to the total book value of assets of firms in the three-digit SIC code for that year. We compute this measure using the target firms main SIC code (obtained from SDC). The fraction of firm overvaluation attributable to industry-wide mispricing (Rhodes-Kropf, Robinson, and Viswanathan, 2005). It is defined as the difference between the valuation using time-varying yearly industry multiples and the valuation using the specific year's average industry multiple, applied to each firm's book value of assets (#AT), net income (#NI), and leverage ratio. The leverage ratio is equal to current liabilities (#DLC) plus total long-term debt (#DLTT), divided by total book assets (#AT). Fraction of shares outstanding held by institutional investors in the quarter prior to the announcement of the acquisition, obtained from Thomson Reuters. In regression analyses, we include the natural logarithm of one plus this fraction. Ratio of total debt to the market value of equity measured at the fiscal year-end prior to the announcement of the deal. Debt is computed by adding long term debt (#DLT) and current liabilities (#DLC). Market value of equity is calculated by multiplying the total number of shares outstanding (#CSHO) by the stock price (#PRCC_F). Captures the portion of the market to book ratio of the target firm that cannot be attributed to firm-specific or industry-specific overvaluation. (Rhodes-Kropf, Robinson, and Viswanathan, 2005). It is calculated as the difference between the value of the firm obtained by applying long-run industry multiples to the firms accounting data, and the current book value of assets (#AT). The accounting data used is the book value of assets (#AT), net income (#NI), and the leverage ratio. The leverage ratio is equal to current liabilities (#DLC) plus total long-term debt (#DLTT), divided by the book value of total assets (#AT). All variables are measured at the fiscal year-end before the announcement of the deal. Ratio of the market to book value of assets measured at the fiscal year-end prior to the acquisition announcement date. The market value of assets is calculated as the book value of total assets (#AT) minus the book value of equity (#CEQ) plus the market value of equity, which equals the total number of shares outstanding (#CSHO) multiplied by the closing price (#PRCC_F). Ratio of R&D expenses of the firm (#XRD) to its total assets (#AT) measured at the fiscal year-end prior to the announcement of the deal. Dummy variable equal to one if the bidders three-digit NAICS code is the same as the targets (obtained from SDC).

Industry Overvaluation

Institutional Ownership

Leverage

Long Run Value to Book

Market to Book

R&D Same Industry

40 Appendix (Continued)
Need for Shareholder Approval Stock Runup Dummy variable equal to one if the bidding-firm shareholders have to approve the deal. This is the case if shares corresponding to more than 20% of the pre-bid outstanding shares are expected to be issued to finance the acquisition (Bethel, Hu, and Wang, 2009). Abnormal stock return over the window [42,2] relative to the deal announcement date, computed using the market model based on the CRSP value-weighted index, as in Schwert (1996). Takeover premium computed following the Officer (2003) methodology, scaled by the target's share price four trading days before the announcement. Premiums below zero and above two are excluded. Dummy variable equal to one when the announced transaction is classified as a tender offer by SDC. Dummy variable equal to one if the deal agreement mentions a termination fee for the acquirer/target (obtained from SDC). Book value of total assets (#AT) measured at fiscal year-end prior to the deal announcement. Standard deviation of the market-adjusted residuals of stock returns measured over the window [305, 43] relative to the announcement date (as in Moeller, Schlingemann, and Stulz, 2007).

Takeover Premium

Tender Offer Termination Fee Total Assets Volatility

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46 Officer, M. 2004. Collars and Renegotiation in Mergers and Acquisitions. Journal of Finance 59: 2719-2743. Officer, M., A. Poulsen, and M. Stegemoller. 2009. Target-Firm Information Asymmetry and Acquirer Returns. Review of Finance 13: 467-493. Patell, J. 1976. Corporate Forecasts of Earnings per Share and Stock Price Behaviour: Empirical Tests. Journal of Accounting Research 14: 246-276. Rhodes-Kropf, M., D. Robinson, S. Viswanathan. 2005. Valuation Waves and Merger Activity: The Empirical Evidence. Journal of Financial Economics 77: 561-603. Rhodes-Kropf, M., and S. Viswanathan. 2004. Market Valuation and Merger Waves. Journal of Finance 59: 2685-2718. Romano, R. 1985. Law as a Product: Some Pieces of the Incorporation Puzzle. Journal of Law, Economics, and Organization 1: 225-283. Schlingemann F., R. Stulz, and R. Walkling. 2002. Divestitures and the Liquidity of the Market for Corporate Assets. Journal of Financial Economics 64: 114-144. Schwert, G. 1996. Markup Pricing in Mergers and Acquisitions. Journal of Financial Economics 41: 153-192. Servaes, H., and M. Zenner. 1996. The Role of Investment Banks in Acquisitions. Review of Financial Studies 9: 787-815. Seshadri, P., R. Peters, J. Gell, G. Morsches, and M. Finger. 2007. Utility M&A: Beating the Odds. Boston Consulting Group report. Skinner, D. 1997. Earnings Disclosures and Stockholder Lawsuits. Journal of Accounting and Economics 23: 249-282.

47 Travlos, N. 1987. Corporate Takeover Bids, Methods of Payment, and Bidding Firms Stock Returns. Journal of Finance 42: 943-963. Verrecchia, R. 1990. Information Quality and Discretionary Disclosure. Journal of Accounting and Economics 12: 365-380. Verrecchia, R. 2001. Essays on Disclosure. Journal of Accounting and Economics 32: 97180.

48
Table 1 Hypotheses on determinants of voluntary synergy disclosure and associated testable predictions Hypothesis Testable predictions Determinants of synergy disclosures Impact of synergy disclosures on acquirer stock returns Positive impact Impact of synergy disclosures on likelihood of deal competition No impact Impact of synergy disclosures on likelihood of deal completion No impact

Shareholder Uncertainty

Equity Payment (+) Industry Liquidity Index () Same Industry () Target Volatility (+) Target Total Assets () Acquirer Volatility (+) Acquirer Total Assets () Industry Liquidity Index (+) Same Industry (+) Target Volatility () Target Total Assets (+) Hostile Deal () Delaware (+) Acquirer FCF (+) Acquirer Leverage () Acquirer Institutional Ownership () Acquirer CEO Ownership () Acquirer GIM Index (+) Acquirer Concentration Ratio (+) Same Industry (+) Acquirer Concentration Ratio () Target Market To Book () Target R&D () Acquirer Market to Book () Acquirer R&D () Need for Shareholder Approval (+) Takeover Premium () Tender Offer (+) Equity Payment (+)

Management Uncertainty

Positive impact

No impact

No impact

Agency Costs

Positive impact

No impact

No impact

Antitrust

No impact

No impact

Positive impact

Proprietary Costs

No impact

Positive impact

No impact

Shareholder Approval

No impact

No impact

Positive impact

This table presents the hypotheses on the determinants of voluntary synergy disclosures and the associated testable predictions.

49
Table 2 Yearly distribution of disclosing and non-disclosing deals Year Disclosure Non-disclosure Disclosing deals as fraction of all deals

Value of disclosing deals as fraction of total deal value 38.95% 22.67% 18.05% 45.45% 29.76% 50.69% 61.95% 16.59% 29.92% 27.14% 55.81% 63.85% 52.75% 77.10%

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

11 11 23 36 22 30 17 12 21 32 20 27 36 17

137 132 195 171 176 116 113 48 74 63 66 60 62 42

7.43% 7.69% 10.55% 17.39% 11.11% 20.55% 13.08% 20.00% 22.11% 33.68% 23.26% 31.03% 36.73% 28.81%

315 1,455 17.80% 41.98% TOTAL This table presents the number and relative value of disclosing and no-disclosing deals per year. The sample consists of M&A deals between U.S. public firms announced from 1995 to 2008. Disclosing deals are deals in which managers of the acquiring firm publicly disclose a forecast of the value of the synergies they expect to achieve. Deal value is obtained from SDC.

50
Table 3 Univariate comparison of disclosing and non-disclosing deals Variable Disclosing Non-disclosing deals deals Mean Equity Payment Industry Liquidity Index Same Industry Target Volatility Target Total Assets Acquirer Volatility Acquirer Total Assets Hostile Deal Delaware Acquirer FCF Acquirer Leverage Acquirer Institutional Ownership Acquirer CEO Ownership (%) Acquirer GIM Index Acquirer Concentration Ratio Target Market to Book Target R&D (%) Acquirer Market to Book Acquirer R&D (%) Need for Shareholder Approval Takeover Premium 0.846 0.079 0.683 0.438 5,131 0.336 21,399 0.070 0.581 0.035 0.623 0.644 0.672 9.596 18.656 1.698 0.058 1.886 0.128 0.594 0.445 Median 1 0.023 1 0.376 1,235 0.304 3,494 0 1 0.031 0.295 0.679 0.182 9.000 18.000 1.276 0 1.454 0 1 0.353 Mean 0.730 0.080 0.639 0.583 1,275 0.395 13,427 0.077 0.496 0.034 0.523 0.544 2.087 9.324 17.688 1.925 0.108 2.336 0.381 0.320 0.517 Median 1 0.034 1 0.519 229 0.333 2,266 0 0 0.029 0.186 0.562 0.194 9.000 14.800 1.257 0 1.557 0 0 0.417

t-/2 statistic for difference in means 449.686*** 0.159 270.947

***

1,770 1,770 1,770 1,770 1,770 1,770 1,770 1,770 1,770 1,770 1,770 1,770 852 1,118 1,770 1,770 1,770 1,770 1,770 1,770 1,770

8.123
10.205 3.710

***

*** ***

4.483

***

1.520 140.612 0.100 1.945 6.160

* * ***

3.529

***

1.417 1.243

2.154 0.790 3.745*** 2.241**

74.712
*** ***

**

Tender Offer 0.095 0 0.172 0 1,770 This table compares proxies for potential determinants of the decision to disclose synergies for disclosing and non-disclosing deals. Disclosing deals are M&As in which acquirer management publicly discloses a forecast of the value of the synergies they expect to achieve. We use a t- (2-) test to assess the significance of the differences among disclosing and non-disclosing deals for continuous (dummy) variables. N denotes the number of observations for which the variable is available. The Appendix includes a detailed description of all explanatory variables. ***, **, and * denote statistical significance at the 1%, 5%, and 10% level, respectively.

3.082 5.019**

51
Table 4 Probit analysis of the determinants of the synergy disclosure decision Variables

Equity Payment Industry Liquidity Index Same Industry Target Volatility Target Log(Total Assets) Acquirer Volatility Acquirer Log(Total Assets) Hostile Deal Delaware Acquirer FCF Acquirer Leverage Acquirer Institutional Ownership Acquirer CEO Ownership Acquirer GIM Index Acquirer Concentration Ratio Target Market to Book Target R&D Acquirer Market to Book Acquirer R&D

Parameter estimate (z-statistic) (1) (2) Synergy Synergy Disclosure Disclosure 0.140 0.324*** (2.769) (0.662) 1.002*** 1.791*** (3.353) (3.925) 0.130 0.379*** (3.289) (1.292) 0.221 0.802* (0.865) (1.871) 0.556*** 0.506*** (7.980) (6.149) 0.756* 0.419 (1.748) (0.409) 0.171*** 0.302*** (2.785) (3.444) 0.402** 0.605** (2.188) (2.093) 0.128 0.054 (1.495) (0.299) 0.534 2.864*** (3.170) (1.126) 0.035 0.012 (0.510) (0.080) 0.171 0.235 (0.533) (0.231) 12.655*** (2.701) 0.009 (0.298) 0.014** 0.007* (2.126) (1.684) 0.082* (1.771) 0.145*** (2.623) 1.400 (0.072)

4.689** (2.031) 0.074* (1.883) 2.468 (0.634)

0.058* (1.955)
1.959 (0.269)

52
Table 4 (Continued) Need for Shareholder Approval Tender Offer Takeover Premium Intercept Pseudo R-Square N

0.217*** (3.065) 0.075 (0.485) 0.183** (2.093) 3.810*** (7.977) 0.325

0.193 (1.314) 0.082 (0.421) 0.139 (0.814) 2.036** (2.045) 0.384

1,770 730 This table presents a probit analysis of the determinants of the synergy disclosure decision. The dependent variable is a Synergy Disclosure dummy equal to one if acquirer management publicly discloses a forecasted synergy value, and equal to zero otherwise. All explanatory variables are described in the Appendix. All models include year and industry dummy variables, the latter based on the acquirers twodigit SIC code. z-statistics (reported in brackets) are computed using robust standard errors clustered per industry. N denotes the number of observations for which the analysis can be executed. ***, **, and * denote statistical significance at the 1%, 5%, and 10% level, respectively.

53
Table 5 Probit analysis of the determinants of low synergy announcements Variables Parameter estimate (z-statistic) Low Disclosed Synergy Delaware 0.819*** (3.714) Equity Payment 0.605* (1.876) Industry Liquidity Index 2.187*** (2.850) Same Industry 0.212 (0.837) Target Volatility 1.327 (1.484) Target Log(Total Assets) 0.277*** (2.687) Acquirer Volatility 1.659 (0.926) Acquirer Log(Total Assets) 0.018 (0.221) Acquirer FCF 2.170 (1.163) Acquirer Leverage 0.149 (0.863) Acquirer Institutional Ownership 2.367** (2.366) Target Firm Specific Overvaluation 0.798*** (2.629) Target Industry Overvaluation 0.619 (0.508) Target Long Run Value to Book 1.057*** (2.700) Acquirer Concentration Ratio 0.010 (1.022) Target R&D 5.645 (0.242) Acquirer Market to Book 0.091 (1.056) Acquirer R&D 2.755 (0.241) Intercept 4.844*** (4.004) Pseudo R-Square 0.320 N 276

This table reports the results of a probit regression in which the dependent variable takes the value one for Low Disclosed Synergy deals, and the value zero for all other disclosing deals. Low Disclosed Synergy deals as M&As in which the ratio of the present value of the forecasted synergies to the takeover premium offered is lower than the bottom tercile of the value of this ratio for the entire sample (i.e., 62.75%). All explanatory variables are described in the Appendix. The model includes year and industry dummy variables, the latter based on the acquirers two-digit SIC code. z-statistics (reported in brackets) are based on standard errors robust to heteroskedasticity and clustered per industry. N denotes the number of observations. ***, **, and * denote statistical significance at the 1%, 5%, and 10% level, respectively.

54
Table 6 Regression analysis of the impact of synergy disclosure on acquirer stock returns Variables Parameter estimate Parameter estimate (t-statistic) (z-statistic) (2) (1) CAR[1,1] CAR[1,1] Synergy Disclosure 0.007 0.054*** (2.990) (1.063) Synergy Ratio 0.104*** 0.106*** (3.252) (4.837) Equity Payment 0.013*** 0.016*** (2.962) (2.873) Industry Liquidity Index 0.004 0.012 (0.247) (1.099) Same Industry 0.007 0.006 (1.655) (1.351) Target Volatility 0.010 0.012 (0.770) (1.099) Target Log(Total Assets) 0.008*** 0.012*** (2.875) (4.876) ** Acquirer Volatility 0.043 0.034* (2.637) (1.847) Acquirer Log(Total Assets) 0.003 0.004** (2.235) (1.277) Hostile Deal 0.014 0.021* (1.732) (0.983) 0.006 Delaware 0.007** (2.193) (1.412) Acquirer FCF 0.035 0.036 (1.080) (1.339) Acquirer Leverage 0.004 0.004 (1.669) (1.211) Acquirer Institutional Ownership 0.011 0.013 (0.738) (0.910) Acquirer Concentration Ratio 0.000 0.003 (1.443) (0.618) Target Market to Book 0.004*** 0.005*** (2.925) (2.944) 0.323* Target R&D 0.256* (1.749) (1.656) Acquirer Market to Book 0.002 0.001 (1.103) (0.910) Acquirer R&D 0.071 0.046 (0.997) (0.447) Takeover Premium 0.009* 0.006 (1.871) (1.084) 0.009 Tender Offer 0.008 (1.279) (1.490) Need for Shareholder Approval 0.027*** 0.024*** (4.319) (4.931)

55
Table 6 (Continued) Target Stock Runup Inverse Mills Intercept Adjusted R-Square Wald Chi-Square N 1,537 0.056*** (3.540) 0.144

0.019 (1.617)

0.019** (2.070) 0.029*** (2.775) 0.062*** (2.629) 643.77*** 1,537

This table presents the results of a regression analysis of acquiring-firm cumulative abnormal stock returns over the window [1,+1] surrounding the M&A announcement date, estimated using the market model based on the CRSP value-weighted index. Synergy Disclosure is a dummy variable taking the value one if the acquiring firm publicly discloses the value of the synergies it expects to achieve, and equal to zero otherwise. Synergy Ratio is the ratio of the present value of the forecasted synergy-related cash flows minus the takeover premium in dollars, scaled by the market value of the acquiring firm's equity measured four trading days before the announcement date (obtained from CRSP). The present value of synergyrelated cash flows is computed following the methodology of Houston, James, and Ryngaert (2001). The takeover premium is computed following the Officer (2003) methodology. The Inverse Mills ratio is obtained from the probit regression specified in Model (1) of Table 4. All other explanatory variables are defined in the Appendix. All models include year and industry dummy variables, the latter based on the acquirers two-digit SIC code. t-statistics are computed using robust standard errors clustered per industry. zstatistics are computed using standard errors calculated as suggested in Greene (2003). N denotes the number of observations for which the analysis can be executed. ***, **, and * denote statistical significance at the 1%, 5%, and 10% level, respectively.

56

Table 7 Robustness of results on the impact of synergy disclosures on acquiring-firm stock returns Variables Parameter Parameter estimate estimate (t-statistic) (z-statistic) (2) (1) CAR[1,1] CAR[1,1] Parameter estimate (t-statistic) (3) CAR[1,1] Parameter estimate (z-statistic) (4) CAR[1,10] 0.044** (2.398) 0.112*** (2.369) 0.031 (1.636)

Parameter estimate (z-statistic) (5) CAR[1,20]

Synergy Disclosure

Synergy Ratio

0.039* (1.645) 0.131*** (4.436)

0.049* (1.709) 0.147*** (4.149)

Synergy/Acquirer MV

Unpredicted Synergy Ratio Yes 274 1,533 274 Yes

Control Variables Included?

0.112** (2.481) No

Yes 1,537

Yes 1,537

This table presents the results of a number of alternative specifications of the treatment effects regression presented in Column (2) of Table 6. CAR is the acquiring-firm cumulative abnormal stock return surrounding the M&A announcement date, estimated using the market model based on the CRSP valueweighted index. Synergy Disclosure is a dummy variable taking the value one if the acquiring firm publicly discloses the value of the synergies it expects to achieve, and equal to zero otherwise. Synergy Ratio is the ratio of the present value of the forecasted synergy-related cash flows minus the takeover premium in dollars, scaled by the market value of the acquiring firm's equity measured four trading days before the announcement date (obtained from CRSP). The present value of synergy-related cash flows is computed following the methodology of Houston, James, and Ryngaert (2001). The takeover premium is computed following the Officer (2003) methodology. Models (1) and (3) only include deals in which a synergy forecast is disclosed. Synergy/Acquirer MV is the ratio of the present value of the forecasted synergy-related cash flows (calculated following Houston, James, and Ryngaert, 2001) to the acquiring firms market value of equity, measured four trading days prior to the takeover announcement (obtained from CSRP). Unpredicted Synergy Ratio is the residual of a regression of Synergy Ratio on the explanatory variables included in Model (2) of Table 6, except for the Inverse Mills Ratio. Control variables are all explanatory variables included in Model (1) of Table 6. In Models (2), (4), and (5), the Inverse Mills ratio obtained from the probit regression specified in Column (1) of Table 4 is also included. All other explanatory variables are defined in the Appendix. All models except Model (3) include year and industry dummy variables, the latter based on the acquirers two-digit SIC code. In Models (1) and (3), t-statistics are calculated using robust standard errors and clustered per industry. In Models (2), (4) and (5) z-statistics are computed using standard errors calculated as suggested in Greene (2003) N denotes the number of observations for which the analysis can be executed. ***, **, and * denote statistical significance at the 1%, 5%, and 10% level, respectively.

57
Table 8 Probit analysis of the impact of synergy disclosures on the likelihood of takeover competition for the target firm Variables Parameter estimate (z-statistic) (1) (2) Competing Offer Competing Offer Synergy Disclosure 0.018 (0.076) Synergy Disclosure# 0.610 (0.952) Equity Payment 0.214 0.185 (1.422) (1.217) Industry Liquidity Index 0.496 0.361 (0.929) (0.618) Same Industry 0.180 0.158 (1.142) (1.001) Target Log(Total Assets) 0.128** 0.071 (2.210) (1.031) Acquirer Log(Total Assets) 0.012 0.006 (0.260) (0.146) 1.177*** Hostile Deal 1.158*** (10.119) (11.010) Target Market to Book 0.050 0.048 (0.698) (0.695) Acquirer Market to Book 0.049* 0.042 (1.653) (1.427) Takeover Premium 0.328 0.288 (1.241) (1.054) 0.547*** Tender Offer 0.543*** (3.593) (3.689) 0.190 Need for Shareholder Approval 0.242* (1.670) (1.380) Target Termination Fee 0.089 0.091 (0.683) (0.723) Acquirer Termination Fee 0.080 0.077 (0.437) (0.429) 2.415*** Intercept 2.412*** (5.734) (4.366) Pseudo R-Square 0.262 Log Pseudo Likelihood N 1,682 789.946*** 1,770

Models (1) and (2) present a probit analysis with as dependent variable a Competing Offer dummy variable equal to one when the target receives a competing offer in the 365 days following the original announcement, and equal to zero otherwise. Synergy Disclosure is a dummy variable equal to one if the acquirer publicly discloses the value of the synergies it expects to achieve, and equal to zero otherwise. Synergy Disclosure# is the fitted value of a probit regression with Synergy Disclosure as dependent variable, using all explanatory variables of Model (1) of Table 4 as explanatory variables. All models include year and industry dummy variables, the latter based on the acquirers two-digit SIC code. z-statistics in Model (1) are based on robust standard errors clustered per industry. z-statistics in Model (2) are based on standard errors corrected along the lines suggested by Maddala and Lee (1976). N denotes the number of observations for which the analysis can be executed. ***, **, and * denote statistical significance at the 1%, 5%, and 10% level.

58
Table 9 Probit analysis of the impact of synergy disclosures on the likelihood of deal completion Variables Parameter estimate (z-statistic) (1) (2) Completed Deal Completed Deal Synergy Disclosure 0.110 (0.632) Synergy Disclosure# 0.493 (0.901) Equity Payment 0.047 0.061 (0.482) (0.589) Industry Liquidity Index 0.481 0.380 (1.554) (1.208) Same Industry 0.158 0.166 (1.443) (1.563) Target Log(Total Assets) 0.125** 0.072 (2.179) (1.075) 0.235*** Acquirer Log(Total Assets) 0.246*** (4.018) (3.999) *** Hostile Deal 1.773 1.791*** (5.923) (6.375) Target Market to Book 0.029 0.027 (0.541) (0.505) Acquirer Market to Book 0.027 0.023 (0.594) (0.520) Takeover Premium 0.308*** 0.282*** (2.872) (2.552) 0.752*** Tender Offer 0.783*** (2.884) (3.016) Need for shareholder approval 0.044 0.006 (0.377) (0.049) 0.629*** Target Termination Fee 0.656*** (3.032) (2.746) Acquirer Termination Fee 0.125 0.137 (0.990) (1.077) 1.273*** Competing Offer 1.315*** (8.383) (8.739) 0.427 Intercept 0.639* (1.764) (0.985) Pseudo R-Square 0.371 Log Pseudo Likelihood N 1,705 978.545*** 1,770

Models (1) and (2) present a probit analysis with as dependent variable a Completed Deal dummy variable equal to one when the deal is classified as Completed in SDC, and equal to zero otherwise. Synergy Disclosure is a dummy variable equal to one if the acquirer publicly discloses the value of the synergies it expects to achieve, and equal to zero otherwise. Synergy Disclosure# is the fitted value of a probit regression with Synergy Disclosure as dependent variable, using all explanatory variables of Model (1) of Table 4 as explanatory variables. All models include year and industry dummy variables, the latter based on the acquirers two-digit SIC code. z-statistics in Model (1) are based on robust standard errors clustered per industry. z-statistics in Model (2) are based on standard errors corrected along the lines suggested by Maddala and Lee (1976). N denotes the number of observations for which the analysis can be executed. ***, **, and * denote statistical significance at the 1%, 5%, and 10% level.