Merger Negotiations with Stock Market Feedback

Sandra Betton
Concordia University, Quebec – Department of Finance

B. Espen Eckbo
Tuck School of Business at Dartmouth; European Corporate Governance Institute (ECGI)

Rex Thompson
Southern Methodist University (SMU) – Edwin L. Cox School of Business

Karin S. Thorburn
Norwegian School of Economics; Centre for Economic Policy Research (CEPR); European Corporate Governance Institute (ECGI)

June 8, 2013

Journal of Finance, Forthcoming
ECGI – Finance Working Paper No. 392/2013
Tuck School of Business Working Paper No. 2011-94


Do pre-offer 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 less the 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 strongly rejecting the costly feedback loop.

Merger Negotiations with Stock Market Feedback

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