What Premiums Do Target Shareholders Expect? Explaining Negative Returns Upon Offer Announcements

39 Pages Posted: 6 Jan 2015 Last revised: 9 Jan 2015

See all articles by James S. Ang

James S. Ang

Florida State University; Florida State University - College of Law

Ahmad Ismail

American University of Beirut

Date Written: January 5, 2015

Abstract

We find, in a sample of 7,581 merger offer announcements from 1990 to 2013, shareholders of 1,283 (or 17%) target firms responded to the offer with negative market returns. These investors were disappointed at the offer, despite the price premium. To explain their disappointment, one must understand how target shareholders form expectations of premium to be received. We use a novel empirical design to find the relative weights of the rational vs. behavioral factors underlying the process of expectation formation. The estimated expected premiums are shown to have predictive power in the subsamples of both the positive and negative market responses. We also compare how the weights of the expectation factors change under different market conditions: hot vs. cold M&A regimes, bull vs. bear stock market, financial crisis vs. non crisis periods, and dotcom bubble vs. no bubble.

Keywords: Takeovers, Prospect Theory, behavioral bias, disappointment

JEL Classification: G34, G02

Suggested Citation

Ang, James S. and Ismail, Ahmad, What Premiums Do Target Shareholders Expect? Explaining Negative Returns Upon Offer Announcements (January 5, 2015). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2545514

James S. Ang

Florida State University ( email )

College of Business
Tallahassee, FL 32306-1042
United States
904-644-8208 (Phone)

Florida State University - College of Law ( email )

425 W. Jefferson Street
Tallahassee, FL 32306
United States

Ahmad Ismail (Contact Author)

American University of Beirut ( email )

Bliss Street
Olayan School of Business
Beirut, POB 11236
Lebanon

HOME PAGE: http://www.aub.edu.lb/osb/publicprofile/Pages/profile.aspx?memberID=ai05

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