Scandinavian Working Papers in Business Administration

Discussion Papers,
Norwegian School of Economics, Department of Business and Management Science

No 2011/8: Merger negotiations with stock market feedback

Sandra Betton (), B. Espen Eckbo (), Rex Thompson () and Karin S. Thorburn ()
Additional contact information
Sandra Betton: John Molson School of Business, Concordia University, Postal: Concordia University, John Molson School of Business, 1455 de Maisonneuve Blvd. West, Montreal (Quebec), Canada H3G 1M8
B. Espen Eckbo: Tuck School of Business, Dartmouth College, Postal: Dartmouth College, Tuck School of Business, 100 Tuck Hall, Hanover, NH 03755, USA
Rex Thompson: Cox School of Business, Southern Methodist University, Postal: Southern Methodist University, Cox School of Business, 6212 Bishop Blvd, Dallas, TX 75275, USA
Karin S. Thorburn: Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration, Postal: NHH , Department of Finance and Management Science, Helleveien 30, N-5045 Bergen, Norway

Abstract: Merger negotiations routinely occur amidst economically significant a target stock price runups. Since the source of the runup is unobservable (is it a target stand-alone value change and/or deal anticipation?), feeding the runup back into the offer price risks "paying twice" for the target shares. We present a novel structural empirical analysis of this runup feedback hypothesis. We show that rational deal anticipation implies a nonlinear relationship between the runup and the offer price markup (offer price minus runup). Our large-sample tests confirm the existence of this nonlinearity and reject the feedback hypothesis for the portion of the runup not driven by the market return over the runup period. Also, rational bidding implies that bidder takeover gains are increasing in target runups, which our evidence supports. Bidder toehold acquisitions in the runup period are shown to fuel target runups, but lower rather than raise offer premiums. We conclude that the parties to merger negotiations interpret market-adjusted target runups as reflecting deal anticipation.

Keywords: Merger negotiations; stock market feedback

JEL-codes: G00

48 pages, May 10, 2011

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