We document important links between targets’ institutional ownership and takeover-bid outcomes. Firms’ institutional ownership increases the likelihood of receiving stock-for-stock bids. The impact becomes stronger when information asymmetries are higher, whereas we find little support for alternative channels, such as bidder misvaluation or target-side adverse selection. The information channel is further buttressed in our analyses of institutions’ share-retention decisions, targets’ demand for top-tier advisors, collar provisions, and targets’ share of expected synergies. Our findings suggest that institutions’ information advantage facilitates rational payment design and targets’ bargaining power gains, alleviating deadweight losses associated with stock-for-stock offers.

We provide novel evidence showing that shareholder litigation risk influences firms’ choices of external growth strategies. Using staggered adoption of universal demand (UD) laws, we find that firms under the threat of litigation tend to choose corporate alliances over mergers and acquisitions (M&As). This finding supports the view that alliances offer a low-risk and low-cost alternative to M&As for firms facing litigation risk. Moreover, alliance performance improves after the passage of UD laws, suggesting that firms can make better deal selections under reduced litigation threats. Overall, we establish an unexplored link between litigation risk and firms’ choices of boundary-expanding transactions.

Target acquisitiveness stands out as one of the primary drivers of all the key aspects of the market for corporate takeovers: acquisition announcement returns, probability of deal success, propensity to acquire and be acquired. Acquisitive targets, though a small proportion of the sample, are responsible for half of the overall negative acquisition announcement returns. Our large body of empirical evidence consistently supports the view that the motivation behind acquisitions of acquisitive targets is defensive: acquirers “eat in order not to be eaten”.

We study a novel mechanism through which real options play a prominent role in inducing the skewness of stock returns. Building on the investment-based asset pricing framework, we show that firms’ real options to contract (expand) their businesses when productivity is low (high) can increase return skewness. Consequently, return skewness represents a U-shaped function of firm productivity. Furthermore, the real-options effect is stronger for more flexible firms, characterized by lower scale-adjustment frictions. Employing a large sample of U.S. firms during 1972–2018, we provide a battery of robust empirical evidence consistent with the model predictions. Our findings demonstrate that firm-level real flexibility can impact investors and managers’ decision making.