Reservation Prices in Shareholders’ Response to Freeze-Out Tender Offers

Abstract

We employ a sample of 201 freeze-out tender offers (offers of controlling shareholders to buy all public shares) in Israel to examine how investors’ decision (to accept or reject the offer) is influenced by alternative reference prices, some of which are commonly specified in freeze-out offers. Our findings reveal that average purchase price is the key reservation price - when freeze-out offer price exceeds our novel estimate of the minority shareholders’ average purchase price of the shares, offer acceptance probability increases significantly. Thus, purchase price appears as a more fundamental behavioral anchor than its main competitor - the past 52-weeks high.

Keywords: freeze-out transactions, reference points, loss aversion

JEL Classification: G02, G31, G34