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Sources of target stock price run-up prior to acquisitions

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  • Brigida, Matthew
  • Madura, Jeff
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    Abstract

    The anticipation of an acquisition attracts informed trading, which can cause a high run-up in the target stock price prior to an announced acquisition bid. Because research has shown that bidders do not reduce their bid price to compensate for a relatively high run-up, a larger run-up increases the cost of the acquisition to bidders. Our analysis determines that the target stock price run-up before an announced bid is higher for bidders that are not private equity firms, do friendly acquisitions, are from outside the U.S., rely on newly borrowed funds to finance the acquisition, rely on more investment bank advisors to facilitate the acquisition, and did not previously establish a toehold position in the target. It is also higher when targets are smaller, have listed options traded on them, and are in the technology field. Lastly, target run-up is lower since Sarbanes-Oxley.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economics and Business.

    Volume (Year): 64 (2012)
    Issue (Month): 2 ()
    Pages: 185-198

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    Handle: RePEc:eee:jebusi:v:64:y:2012:i:2:p:185-198

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    Web page: http://www.elsevier.com/locate/jeconbus

    Related research

    Keywords: Informed trading; Insider trading; Target stock price run-up;

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    References

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    Cited by:
    1. Madura, Jeff & Marciniak, Marek, 2014. "Bidder country characteristics and informed trading in U.S. targets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 256-284.

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