Speculation Spreads and the Market Pricing of Proposed Acquisitions

Journal of Corporate Finance, Vol. 10, 2004

Dice Working Paper No. 2000-18

45 Pages Posted: 19 May 2001 Last revised: 11 Mar 2013

See all articles by Jan Jindra

Jan Jindra

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis

Ralph A. Walkling

Drexel University - Lebow College of Business

Date Written: April 5, 2001

Abstract

This paper examines speculation spreads following initial acquisition announcements in 362 cash tender offers spanning the 1981-1995 period. Speculation spreads in acquisitions, defined as the percentage difference between the bid price and market price one-day after the initial announcement, exhibit a positive mean, with considerable cross-sectional variation. In fact, over 23% of these speculation spreads are negative, indicating a post announcement price greater than the initial bid price. We model speculation spreads as the visible component of total speculative returns of the target. Rational traders set speculation spreads anticipating the expected price resolution and length of the acquisition bid. Empirically, we find strong support for key implications of the model. Speculation spreads are significantly negatively related to the magnitude of price revision and significantly positively related to offer duration. These results are robust to the inclusion of bid and offer characteristics known ex ante as well as those only revealed ex post. The results are consistent with market pricing of both offer duration and price resolution at the time of the initial announcement.

JEL Classification: G34, G14, G24

Suggested Citation

Jindra, Jan and Walkling, Ralph August, Speculation Spreads and the Market Pricing of Proposed Acquisitions (April 5, 2001). Dice Working Paper No. 2000-18; Dice Working Paper No. 2000-18. Available at SSRN: https://ssrn.com/abstract=269610 or http://dx.doi.org/10.2139/ssrn.269610

Jan Jindra

U.S. Securities and Exchange Commission - Division of Economic and Risk Analysis ( email )

44 Montgomery Street
San Francisco, CA 94104
United States

Ralph August Walkling (Contact Author)

Drexel University - Lebow College of Business ( email )

LeBow College of Business
Philadelphia, PA 19104
United States
(215) 895-4920 (Phone)
(215) 895-6119 (Fax)

Register to save articles to
your library

Register

Paper statistics

Downloads
783
Abstract Views
2,606
rank
29,980
PlumX Metrics