Merger Negotiations with Stock Market Feedback

Authors

  • SANDRA BETTON,

  • B. ESPEN ECKBO,

  • REX THOMPSON,

  • KARIN S. THORBURN

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    • Betton is at the John Molson School of Business, Concordia University; Eckbo is at the Tuck School of Business at Dartmouth College; Thompson is at the Cox School of Business, Southern Methodist University; and Thorburn is at the Norwegian School of Economics. For helpful comments and discussions, we thank the Editor (Cam Harvey), an Associate Editor and two anonymous referees, Laurent Bach, Eric de Bodt, Michael Lemmon, Pablo Moran, and Annette Poulsen. This paper, and an early precursor entitled “Markup pricing revisited,” also benefitted from comments received in faculty seminars at the following universities and business schools: Aarhus, Adelaide, Arizona, Boston, Calgary, Cambridge, City University of Hong Kong, Colorado, Connecticut, Dartmouth, Georgia, HEC Montreal, Lille, LBS, Lund, Maryland, Melbourne, Navarra, Norwegian School of Economics, BI Norwegian School of Management, Notre Dame, Oregon, Oxford, SMU, Stavanger, Texas A&M, Texas Tech, Tilburg, Tulane, York, and UBC. The paper was also presented at the association meetings of the AFA, EFA, EFMA, FMA, FMAI, and the NFA, as well as at the Paris Spring Corporate Finance Conference and the UBC Summer Finance Conference. Partial financial support from Tuck's Lindenauer Center for Corporate Governance is gratefully acknowledged.


ABSTRACT

Do preoffer target stock price runups increase bidder takeover costs? We present model-based tests of this issue assuming runups are caused by signals that inform investors about potential takeover synergies. Rational deal anticipation implies a relation between target runups and markups (offer value minus runup) that is greater than minus one-for-one and inherently nonlinear. If merger negotiations force bidders to raise the offer with the runup—a costly feedback loop where bidders pay twice for anticipated target synergies—markups become strictly increasing in runups. Large-sample tests support rational deal anticipation in runups while rejecting the costly feedback loop.

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