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://tuck.dartmouth.edu/faculty/faculty-directory/b-espen-eckbo

European Corporate Governance Institute (ECGI)

c/o the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 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 the Royal Academies of Belgium
Rue Ducale 1 Hertogsstraat
1000 Brussels
Belgium

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

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