Do target firms always gain? The determinants of target firms loss in US takeovers

Studies that examine the profitability of mergers and acquisitions document that a considerable proportion (15-20%) of target firms earn negative returns. This study examines why the share price of the target firm reacts negatively to the announcement of some merger deals, while it reacts positively to others. We find that target firms that earn negative returns are less efficient, less profitable, receive a lower premium, are more likely to be paid with stocks, and attract less efficient acquirers than target firms that earn positive returns. The logistic regressions indicate that high relative size, low premium, higher target leverage, equity exchange offers, and mixed payment deals are associated with a higher likelihood of loss for the target firm. Fewer anti-takeover provisions for target firms are associated with a higher probability of loss, because such target firms, if necessary, are more likely to be disciplined by the market and be paid a low premium. Meanwhile, a high G-Index on the part of the acquirer is associated with negative target returns in share exchange offers if the premiums paid do not compensate for the acquirer excess risk.