Trading Activity,Trade Costs and Informed Trading for Acquisition Targets and Acquirers

Abstract

Microstructure effects of tender offer acquisitions on targets and acquirers differentiated by listing venue and payment method are examined. Trading activity increases more for targets than for acquirers upon offer announcement. Investors are more likely to sell targets upon announcement using direct market orders against ask limit orders for cash payment offers. While target liquidity improves as spread costs fall and quoted depths increase, acquirer liquidity falls continuously to successful offer completion. Due to increased trading differences, temporary trade costs fall more for targets than for acquirers. Permanent trade costs decline over the tender offer cycle for both parties, and especially for targets for cash tender offers and for acquirers for shares tender offers. The probability of informed trading declines (remains constant) for targets (acquirers) because increased trading intensity is greater (the same) for uninformed versus informed traders. As expected, abnormal returns and changes in own-firm permanent return volatility are negatively (but weakly) and positively (and strongly) related, respectively, to changes in information asymmetry upon announcement.