Merger negotiations with stock market feedback

Merger negotiations with stock market feedback

Sandra Betton, B. Espen Eckbo, Rex Thompson, Karin Thorburn

Series number :

Serial Number: 
392/2013

Date posted :

November 01 2013

Last revised :

December 06 2013
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Keywords

  • takeovers • 
  • offer premium • 
  • runup • 
  • markup • 
  • feedback loop

Do pre-offer target stock price runups increase bidder takeover costs? We present model-based tests of this issue assuming runups are caused by signals that inform investors about potential takeover synergies. Rational deal anticipation implies a relation between target runups and markups (offer value less the runup) that is greater than minus one-for-one and inherently nonlinear.

If merger negotiations force bidders to raise the offer with the runup --- a costly feedback loop where bidders pay twice for anticipated target synergies --- markups become strictly increasing in runups. Large-sample tests support rational deal anticipation in runups while strongly rejecting the costly feedback loop.

Published in

Published in: 
Publication Title: 
The Journal of Finance
Description: 
Volume 69, Issue 4 August 2014 Pages 1705-1745

Authors

Real name: 
Sandra Betton
Real name: 
Rex Thompson