Takeover Activity and Target Valuations: Feedback Loops in Financial Markets

Abstract:     
Asset prices both affect and reflect real decisions. This paper provides evidence of this two-way relationship in the takeover market. We find that a firm's discount to its potential value significantly attracts takeovers (the "trigger effect") -- but market expectations of an acquisition cause the discount to shrink (the "anticipation effect"). By controlling for the simultaneous anticipation effect, we document a markedly stronger trigger effect from prices to takeover probabilities than prior literature -- an inter-quartile change in the discount leads to a 4 percentage point increase in acquisition likelihood (compared to a 6% unconditional takeover probability). This implies that financial markets may discipline managerial agency by triggering takeover threats, but the anticipation effect reduces the effectiveness of this process.

Keywords: Takeovers, mergers and acquisitions, market valuation, feedback effects, financial and real efficiency, merger waves

JEL Classifications: G34, G14, C14, C34

Working Paper Series