How Much Is Too Much: Are Merger Premiums Too High?


  • We would like to thank George Alexandridis, John Doukas (the editor), Phil Holmes, Herbert Lam, Fengliang Liu, Krishna Paudyal, Dimitris Petmezas, seminar participants at Durham Business School, Renmin University of China, and especially an anonymous referee for helpful comments on previous drafts of this paper. We would also like to thank Yifan Chen and Fangming Xu for their excellent research assistance. (Corresponding author: Huainan Zhao)


Is it too much to pay target firm shareholders a 50% premium on top of market price? Or is it too much to pay a 100% premium when pursuing mergers and acquisitions? How much is too much? In this paper, we examine how the extent of merger premiums paid impacts both the long-run and announcement period stock returns of acquiring firms. We find no evidence that acquirers paying high premiums underperform those paying relatively low premiums in three years following mergers, and the result is robust after controlling for a variety of firm and deal characteristics. Short term cumulative abnormal returns are moreover positively correlated to the level of the premium paid by acquirers. Our evidence therefore suggests that high merger premiums paid are unlikely to be responsible for acquirers' long-run post merger underperformance.