Initial Offer Precision and M&A Outcomes
35 Pages Posted: 3 Sep 2014 Last revised: 16 Nov 2015
Date Written: November 2, 2015
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: Suggested Citation