Takeovers and Divergence of Investor Opinion

67 Pages Posted: 14 Jan 2009 Last revised: 13 Jan 2015

See all articles by Sris Chatterjee

Sris Chatterjee

Fordham University - Gabelli School of Business

Kose John

New York University (NYU) - Department of Finance

An Yan

Fordham University - Gabelli School of Business

Multiple version iconThere are 2 versions of this paper

Date Written: March 2009

Abstract

In this paper, we develop and test five hypotheses relating the takeover premium paid for a target to the investors' divergence of opinion on the target's equity value. For a sample of acquisitions of publicly traded targets, we show that the total takeover premium is higher when investors have higher divergence of opinion on the target's value. Second, we decompose total takeover premium into a stock price runup for the target prior to the takeover announcement and a post-announcement markup. We show that both the target's stock price runup and the post-announcement markup increase with an increase in the divergence of opinion on the target's value. Third, we show that the post-announcement markup and the pre-announcement runup could be positively correlated since both are positively related to the divergence of opinion on the target's value. Fourth, we show that the post-announcement markup decreases with an increase in bidder toehold. Finally, we show that a positive sentiment shock at the market level increases the divergence of opinion on the target's equity value, thereby increasing the total takeover premium, the target runup, and the post-announcement markup. Our results highlight the importance of the divergence of investor opinion in explaining the takeover premium, the pre-announcement runup and the post-announcement markup in mergers and acquisitions.

Keywords: Takeover Premium, Divergence of Opinion

JEL Classification: G34

Suggested Citation

Chatterjee, Sris and John, Kose and Yan, An, Takeovers and Divergence of Investor Opinion (March 2009). Available at SSRN: https://ssrn.com/abstract=1327289 or http://dx.doi.org/10.2139/ssrn.1327289

Sris Chatterjee

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States

Kose John

New York University (NYU) - Department of Finance ( email )

Stern School of Business
44 West 4th Street
New York, NY 10012-1126
United States
212-998-0337 (Phone)
212-995-4233 (Fax)

An Yan (Contact Author)

Fordham University - Gabelli School of Business ( email )

113 West 60th Street
New York, NY 10023
United States
212-636-7401 (Phone)
212-765-5573 (Fax)

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