Does increased appraisal risk have an effect on manager behavior?  Recent research (unpublished) suggests it does.

In this paper (earlier version), the author examines target manager disclosure behavior before and after the significant Transkaryotic decision.  Reviewing mergers before and after that merger, the returns, abnormal returns, and associated disclosures by target management, the author concludes that “target managers’ disclosure strategies respond to increased appraisal risk.”  They find that “at-risk target managers significantly alter their disclosure behavior after the [Transkaryotic] ruling in that they strategically withhold good news to reduce the threat of appraisal during mergers.”  The author also documents and suggests that this “is driven by those target firms whose managers have future economic ties with the acquiring firm, and that acquirers benefit from these ties in the form of a lower likelihood of an appraisal lawsuit and higher post-merger returns after the ruling.”

In a reminder to all investors, the author suggests the importance of further work on target managers’ person incentives, considering the role that those incentives play in “determining the disclosure strategies of their firms during mergers and acquisitions.” Leaving the door open for much-needed research, the author suggest that further study could review whether and how “target CEO retention can assist acquirers in mitigating appraisal risk in Delaware mergers” and how “target CEO-acquirer ties might influence target firm disclosure strategies that benefit acquirers in other meaningful ways in the takeover market.”  Unsurprisingly, the benefits to acquirers often come in part in the form of lower deal premia and lower returns to shareholders.

This work continues the numerous pieces of research showing appraisal, and the exercise of a robust appraisal “check” is good for investors and for the market.