Preemptive Bidding, Target Resistance, and Takeover Premiums
64 Pages Posted: 19 Oct 2011 Last revised: 19 Dec 2013
Date Written: December 1, 2013
We evaluate empirically two sources of large takeover premiums: preemptive bidding and target resistance. We develop an auction model that features costly sequential entry of bidders in takeover contests and encompasses both explanations. We estimate the model parameters by simulated method of moments for a sample of US takeovers. Our estimates imply that target resistance explains the entire magnitude of the premium in 74% of successful single-bidder contests. Simulation experiments show that initial bidders have, on average, a higher valuation for the target than rival bidders, so that a relatively low initial bid is sufficient to deter a rival from entry.
Keywords: Merger, auctions, target resistance, preemptive bidding, structural estimation
JEL Classification: D44, G34
Suggested Citation: Suggested Citation