Rethinking Measures of Mergers & Acquisitions Deal Premiums
Journal of Financial and Quantitative Analysis (JFQA), Vol. 56, 2021, pp. 1097-1126
76 Pages Posted: 8 Mar 2018 Last revised: 22 Apr 2021
Date Written: October 14, 2019
Many academic studies use fixed pre-announcement event days (such as -20, -42, or -63) to measure takeover premiums. In this paper, we show that the use of traditional fixed windows generates premiums that are underestimated by as much as eight percentage points. This downward bias is especially severe for transactions with long processes (such as target-initiated deals). We take account of this bias by hand-collecting deal initiation dates and show that using these dates results in measured premiums that give contradictory conclusions to those found in existing literature. We also offer guidance for measuring premiums if hand-collecting data is impractical.
Keywords: measure takeover premiums, deal initiation, CEO career preferences, anchoring bias, target price runup
JEL Classification: G14, G30, G34
Suggested Citation: Suggested Citation