Initial Offer Precision and M&A Outcomes

35 Pages Posted: 3 Sep 2014 Last revised: 16 Nov 2015

See all articles by Petri Hukkanen

Petri Hukkanen

Aalto University

Matti Keloharju

Aalto University School of Business; Research Institute of Industrial Economics (IFN); Centre for Economic Policy Research (CEPR)

Date Written: November 2, 2015

Abstract

Building on recent research in social psychology, this paper analyzes the link between the precision of initial cash offers and M&A outcomes. About one-half of the offers are made at the precision of one or five dollars per share, and an additional one-third at the precision of half dollar or one quarter. The practice of making offers at round price-per-share levels is associated with the following unfavorable outcomes for the bidder: (1) higher purchase price for target shares, (2) lower probability to complete the deal, and (3) lower announcement return. A median-sized offer made at the precision of one or five dollars per share is associated with a 4−5 million dollars higher expected transaction price than one made at a precision greater than one quarter.

Keywords: Initial offers, precision, mergers and acquisitions

JEL Classification: G34

Suggested Citation

Hukkanen, Petri and Keloharju, Matti, Initial Offer Precision and M&A Outcomes (November 2, 2015). IFN Working Paper No. 1038; Harvard Business School Research Paper No. 16-058. Available at SSRN: https://ssrn.com/abstract=2490538 or http://dx.doi.org/10.2139/ssrn.2490538

Petri Hukkanen

Aalto University ( email )

P.O. Box 21210
Helsinki, 00101
Finland

Matti Keloharju (Contact Author)

Aalto University School of Business ( email )

P.O. Box 21210
AALTO, FI-00076
Finland

Research Institute of Industrial Economics (IFN) ( email )

Box 55665
Grevgatan 34, 2nd floor
Stockholm, SE-102 15
Sweden

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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