Job Market Paper

Appraisal Risk and Corporate Disclosure During Mergers and Acquisitions

Abstract:
This study examines whether and how target managers alter their disclosure behavior in response to heightened appraisal risk during mergers and acquisitions. Appraisal laws give target shareholders the right to receive a judge’s determined value in lieu of the acquirer’s offer. Target-firm disclosures play a critical role in the valuation decisions of judges; and valuation decisions pose a substantial risk to acquirers. Using a landmark court ruling that significantly strengthened appraisal rights in Delaware while leaving shareholder rights in all other states unaffected, I show that at-risk target managers strategically withhold good news during mergers when the risk of appraisal is heightened. I further document that this observation is driven by target managers who are aligned with acquirers, and that acquirers benefit in the form of a lower likelihood of appraisal and higher post-acquisition returns. My findings suggest that acquirer-provided incentives play a key role in determining target managers’ disclosure strategies during mergers, and that retaining target managers can provide an important benefit to acquirers in the form of control over the information environment in mergers.