What Premiums Do Target Shareholders Expect? Explaining Negative Returns Upon Offer Announcements
39 Pages Posted: 6 Jan 2015 Last revised: 9 Jan 2015
Date Written: January 5, 2015
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: Suggested Citation