Merger Negotiations with Stock Market Feedback

63 Pages Posted: 10 May 2011 Last revised: 6 Dec 2013

See all articles by Sandra Betton

Sandra Betton

Concordia University, Quebec - Department of Finance

B. Espen Eckbo

Tuck School of Business at Dartmouth; European Corporate Governance Institute (ECGI)

Rex Thompson

affiliation not provided to SSRN

Karin S. Thorburn

Norwegian School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

Date Written: June 8, 2013

Abstract

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.

Keywords: Merger negotiations, market feedback loop, takeover bid, offer price markup, target runup, rational bidding, market efficiency, nonlinear test

JEL Classification: G3, G34

Suggested Citation

Betton, Sandra and Eckbo, B. Espen and Thompson, Rex W. and Thorburn, Karin S., Merger Negotiations with Stock Market Feedback (June 8, 2013). Journal of Finance, Forthcoming; ECGI - Finance Working Paper No. 392/2013; Tuck School of Business Working Paper No. 2011-94. Available at SSRN: https://ssrn.com/abstract=1835073 or http://dx.doi.org/10.2139/ssrn.1835073

Sandra Betton

Concordia University, Quebec - Department of Finance ( email )

Montreal, Quebec H3G 1M8
Canada
514-848-2783 (Phone)
514-848-4500 (Fax)

B. Espen Eckbo (Contact Author)

Tuck School of Business at Dartmouth ( email )

Hanover, NH 03755
United States
603-646-3953 (Phone)
603-646-3805 (Fax)

HOME PAGE: http://www.tuck.dartmouth.edu/eckbo

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

Rex W. Thompson

affiliation not provided to SSRN

Karin S. Thorburn

Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway
+4755959283 (Phone)

HOME PAGE: http://www.nhh.no/cv/thorburn

Centre for Economic Policy Research (CEPR)

London
United Kingdom

European Corporate Governance Institute (ECGI)

c/o ECARES ULB CP 114
B-1050 Brussels
Belgium

HOME PAGE: http://www.ecgi.org

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