Rethinking Measures of M&A Deal Premiums

Forthcoming, Journal of Financial and Quantitative Analysis

76 Pages Posted: 8 Mar 2018 Last revised: 1 Nov 2019

See all articles by Gregory W. Eaton

Gregory W. Eaton

Oklahoma State University - Stillwater - Department of Finance

Tingting Liu

Iowa State University

Micah S. Officer

Loyola Marymount University - Department of Finance and Computer Information Systems

Date Written: October 14, 2019

Abstract

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

Eaton, Gregory W. and Liu, Tingting and Officer, Micah S., Rethinking Measures of M&A Deal Premiums (October 14, 2019). Forthcoming, Journal of Financial and Quantitative Analysis. Available at SSRN: https://ssrn.com/abstract=3132054 or http://dx.doi.org/10.2139/ssrn.3132054

Gregory W. Eaton (Contact Author)

Oklahoma State University - Stillwater - Department of Finance ( email )

Spears School of Business
Stillwater, OK 74078-4011
United States

Tingting Liu

Iowa State University ( email )

2330 Gerdin Business Building
Ames, IA 50011
United States

Micah S. Officer

Loyola Marymount University - Department of Finance and Computer Information Systems ( email )

Los Angeles, CA 90045
United States

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