Hostname: page-component-857557d7f7-8wkb5 Total loading time: 0 Render date: 2025-12-03T22:17:48.763Z Has data issue: false hasContentIssue false
  • English
  • Français

Rethinking Measures of Mergers & Acquisitions Deal Premiums

Published online by Cambridge University Press:  17 December 2019

Gregory W. Eaton ,
Tingting Liu Open the ORCID record for Tingting Liu [Opens in a new window]  and
Micah S. Officer
Gregory W. Eaton
Affiliation:
Eaton, gregory.eaton@okstate.edu, Oklahoma State University
Tingting Liu*
Affiliation:
Liu, ttliu@iastate.edu, Iowa State University
Micah S. Officer
Affiliation:
Officer, micah.officer@lmu.edu, Loyola Marymount University
*
Liu (corresponding author), ttliu@iastate.edu
Get access Rights & Permissions [Opens in a new window]

Abstract

Many academic studies use fixed preannouncement event days (e.g., -20,-42, or -63) to measure takeover premiums. In this paper, we show that the use of traditional fixed windows generates premiums that are underestimated by as much as 8 percentage points. This downward bias is especially severe for transactions with long processes (e.g., target-initiated deals). We take account of this bias by hand collecting deal initiation dates and show that using these dates results in measured premiums that give contradictory conclusions to those found in existing literature. We also offer guidance for measuring premiums if hand collecting data is impractical.

Information

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 56 , Issue 3 , May 2021 , pp. 1097 - 1126
Copyright
© The Author(s). Published by Cambridge University Press on behalf of Michael G. Foster School of Business, University of Washington 2019

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

Footnotes

*

We thank an anonymous referee, Nihat Aktas, Eric de Bodt, Audra Boone, Jean-Gabriel Cousin, Eli Fich, Paul Malatesta (the editor), Ronald Masulis, Harold Mulherin, Jeffry Netter, Annette Poulsen, Serif Aziz Simsir, and Anh Tran for providing helpful comments. All errors are our own.

References

Ahern, K. R. “Bargaining Power and Industry Dependence in Mergers.” Journal of Financial Economics, 103 (2012), 530–550.Google Scholar
Ahern, K. R., and Sosyura, D.. “Who Writes the News? Corporate Press Releases during Merger Negotiations.” Journal of Finance, 69 (2014), 241–291.CrossRefGoogle Scholar
Aktas, N.; de Bodt, E.; Bollaert, H.; and Roll, R.. “CEO Narcissism and the Takeover Process: From Private Initiation to Deal Completion.” Journal of Financial and Quantitative Analysis, 51 (2016), 113–137.CrossRefGoogle Scholar
Aktas, N.; de Bodt, E.; and Roll, R.. “Negotiations under the Threat of an Auction.” Journal of Finance Economics, 98 (2010), 241–255.CrossRefGoogle Scholar
Andrade, G.; Mitchell, M.; and Stafford, E.. “New Evidence and Perspectives on Mergers.” Journal of Economic Perspectives, 15 (2001), 103–120.CrossRefGoogle Scholar
Angrist, J. D. “Estimation of Limited Dependent Variable Models with Dummy Endogenous Regressors.” Journal of Business & Economic Statistics, 19 (2001), 2–28.CrossRefGoogle Scholar
Baker, M.; Pan, X.; and Wurgler, J.. “The Effect of Reference Point Prices on Mergers and Acquisitions.” Journal of Finance Economics, 106 (2012), 49–71.CrossRefGoogle Scholar
Bebchuk, L. A.; Coates, J. C. IV; and Subramanian, G.. “The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy.” Stanford Law Review, 54 (2002), 887–951.CrossRefGoogle Scholar
Betton, S.; Eckbo, B. E.; and Thorburn, K. S.. “Corporate Takeovers.” In Handbook of Corporate Finance: Empirical Corporate Finance, Vol. 2, Eckbo, B. E., ed. Amsterdam: Elsevier/North-Holland (2008), 291–430.CrossRefGoogle Scholar
Betton, S.; Eckbo, B. E.; and Thorburn, K. S.. “Merger Negotiations and the Toehold Puzzle.” Journal of Finance Economics, 91 (2009), 158–178.Google Scholar
Boone, A. L., and Mulherin, J. H.. “How Are Firms Sold? ” Journal of Finance, 62 (2007), 847–875.Google Scholar
Boone, A. L., and Mulherin, J. H.. “Is There One Best Way to Sell a Company? Auctions versus Negotiations and Controlled Sales.” Journal of Applied Corporate Finance, 21 (2009), 28–37.CrossRefGoogle Scholar
Boone, A. L., and Mulherin, J. H.. “Do Private Equity Consortiums Facilitate Collusion in Takeover Bidding? ” Journal of Corporate Finance, 17 (2011), 1475–1495.CrossRefGoogle Scholar
De Bodt, E.; Cousin, J.; and Demidova, I.. “M&A Outcomes and Willingness to Sell.” Review of Finance, 1 (2014), 7–49.Google Scholar
Fich, E. M.; Cai, J.; and Tran, A. L.. “Stock Option Grants to Target CEOs During Private Merger Negotiations.” Journal of Finance Economics, 101 (2011), 413–430.CrossRefGoogle Scholar
Fidrmuc, J. P., and Moeller, S. B.. “Bidding Competition and Premiums in M&As.” Working Paper, Warwick Business School (2014).Google Scholar
Hansen, R. G. “Auctions of Companies.” Economic Inquiry, 39 (2001), 30–43.CrossRefGoogle Scholar
Harford, J. “What Drives Merger Waves? ” Journal of Finance Economics, 77 (2005), 529–560.CrossRefGoogle Scholar
Heitzman, S. “Equity Grants to Target CEOs During Deal Negotiations.” Journal of Finance Economics, 102 (2011), 251–271.CrossRefGoogle Scholar
Huang, Y., and Walkling, R. A.. “Target Abnormal Returns Associated with Acquisition Announcements: Payment, Acquisition Form, and Managerial Resistance.” Journal of Finance Economics, 19 (1987), 329–349.CrossRefGoogle Scholar
Imbens, G. W., and Kalyanaraman, K.. “Optimal Bandwidth Choice for the Regression Discontinuity Estimator.” Review of Economic Studies, 79 (2011), 933–959.CrossRefGoogle Scholar
Imbens, G. W., and Lemieux, T.. “Regression Discontinuity Designs: A Guide to Practice.” Journal of Econometrics, 142 (2008), 615–635.CrossRefGoogle Scholar
Jarrell, G. A., and Poulsen, A. B.. “Stock Trading Before the Announcement of Tender Offers: Insider Trading or Market Anticipation? ” Journal of Law Economics and Organization, 5 (1989), 225–248.Google Scholar
Jenter, D., and Lewellen, K.. “CEO Preferences and Acquisitions.” Journal of Finance, 70 (2015), 2813–2852.CrossRefGoogle Scholar
Lancaster, T. “The Incidental Parameter Problem Since 1948.” Journal of Econometrics, 95 (2000), 391–413.Google Scholar
Lee, D. S., and Lemieux, T.. “Regression Discontinuity Designs in Economics.” Journal of Economic Literature, 48 (2010), 281–355.CrossRefGoogle Scholar
Liu, T., and Mulherin, J. H.. “How Has Takeover Competition Changed over Time? ” Journal of Corporate Finance, 49 (2018), 104–119.CrossRefGoogle Scholar
Liu, T.; Mulherin, J. H.; and Brown, W. O. Jr. “The Development of the Takeover Auction Process: The Evolution of Property Rights in the Modern Wild West.” Working Paper, Iowa State University (2018).CrossRefGoogle Scholar
Lumsdaine, R. L.; Stock, J. H.; and Wise, D. A.. “Why Are Retirement Rates So High at Age 65? ” In Advances in the Economics of Aging, University of Chicago Press (1996), 61–82.Google Scholar
Masulis, R. W., and Simsir, S. A.. “Deal Initiation in Mergers and Acquisitions.” Journal of Financial and Quantitative Analysis, 53 (2018), 2389–2430.CrossRefGoogle Scholar
Meulbroek, L. K. “An Empirical Analysis of Illegal Insider Trading.” Journal of Finance, 47 (1992), 1661–1700.Google Scholar
Moeller, T. “Let’s Make a Deal! How Shareholder Control Impacts Merger Payoffs.” Journal of Finance Economics, 76 (2005), 167–190.CrossRefGoogle Scholar
Mulherin, J. H., and Simsir, S. A.. “Measuring Deal Premiums in Takeovers.” Financial Management, 44 (2015), 1–14.Google Scholar
Mulherin, J. H., and Womack, K. S.. “Who Initiates the Corporate Takeover Process? Causes and Effects.” Working Paper, University of Georgia (2015).Google Scholar
Officer, M. S. “Termination Fees in Mergers and Acquisitions.” Journal of Finance Economics, 69 (2003), 431–467.CrossRefGoogle Scholar
Roberts, M. R., and Whited, T. M.. “Endogeneity in Empirical Corporate Finance.” In Handbook of the Economics of Finance, Vol. 2, Part A, Constantinides, G., Stulz, R., and Harris, M., eds. Amsterdam: Elsevier/North-Holland (2013), 493–572.CrossRefGoogle Scholar
Sanders, R. W., and Zdanowicz, J. S.. “Target Firm Abnormal Returns Around the Initiation of Change in Control Transactions.” Journal of Financial and Quantitative Analysis, 27 (1992), 109–129.CrossRefGoogle Scholar
Schwert, G. W. “Markup Pricing in Mergers and Acquisitions.” Journal of Finance Economics, 41 (1996), 153–192.CrossRefGoogle Scholar
Schwert, G. W. “Hostility in Takeovers: In the Eyes of the Beholder? ” Journal of Finance, 55 (2000), 2599–2640.Google Scholar
Supplementary material: File

Eaton et al. Supplementary Materials

Eaton et al. Supplementary Materials

Download Eaton et al. Supplementary Materials(File)
File 434.6 KB