Information from capital markets to firms during corporate takeovers

I study the information flow from the capital market to firms during the takeover negotiation process. Investors in the market collectively have strong public information processing capacity and thus possess information that firm managers may not know. Takeovers are major firm investment decisions, which are often made by a small number of top managers in firms. These managers should have incentive to learn from the market. A manager "learns" from the market if he receives new information from the market and considers it in making later decisions, such as deal closing and renegotiation.; Chapter 1 investigates if such learning occurs. I first improve the current testing methods and then document, for the first time in the literature, definitive evidence consistent with learning. Specifically, learning occurs in deals that are announced before firms have signed definitive merger agreements, in deals that happen in non-high-tech industries, and in deals with small-cap bidders. These results are consistent with the predictions that firms have a greater incentive to learn from the market when the cost of canceling an announced deal is lower or when the market is likely to have more unique information that the manager would not know without learning.; Chapter 2 investigates why some firms announce their deals before they have signed definitive merger contracts and others do so only after such contracts. One result of Chapter 1 is that firms more easily utilize the market information if without a binding contract. Why don't all firms disclose their takeover deals before a contract? Evidence in Chapter 2 is most supportive to the hypothesis that firms choose this timing decision strategically. An announcement before a definitive agreement allows for more firm discretion in canceling an ex post bad deal, whereas one after such an agreement entails a higher level of mutual commitment and delays information revelation to potential competitors both on the corporate control and the product market. Firms balance the two information considerations in making this timing decision.