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Mark-up Pricing in Mergers and Acquisitions

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  • Schwert, G.W.

Abstract

This paper studies the premiums paid in successful tender offers and mergers involving NYSE and Amex-listed target firms from 1975-91 in relation to pre-announcement stock price runups. It has been conventional to measure corporate control premiums including the price runups that occur before the initial formal bid. There has been little evidence on the relation between the pre-bid runup and the post-announcement premium (the premium paid to target stockholders measured from the date of the first bid). Under what circumstances are runups associated with larger total premiums? The evidence in this paper shows that in most cases, the pre-bid runup and the post- announcement premium are uncorrelated (i.e. little or no substitution between the runup and the post-announcement premium), so the runup is an added cost to the bidder. This has important implications for assessing the costs of illegal insider trading based on private information about a potential bid.

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Bibliographic Info

Paper provided by Rochester, Business - Financial Research and Policy Studies in its series Papers with number 95-01.

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Length: 38 pages
Date of creation: 1994
Date of revision:
Handle: RePEc:fth:robufr:95-01

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Postal: UNIVERSITY OF ROCHESTER, WILLIAM E. SIMON GRADUATE SCHOOL OF BUSINESS ADMINISTRATION, Bradley Policy Research Center, ROCHESTER NEW YORK 14627 U.S.A.
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Web page: http://www.simon.rochester.edu/
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Keywords: STOCK MARKET; PRICING; INFORMATION;

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References

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  1. Bradley, Michael & Desai, Anand & Kim, E. Han, 1983. "The rationale behind interfirm tender offers : Information or synergy?," Journal of Financial Economics, Elsevier, vol. 11(1-4), pages 183-206, April.
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  8. Jarrell, Gregg A & Poulsen, Annette B, 1989. "Stock Trading before the Announcement of Tender Offers: Insider Trading or Market Anticipation?," Journal of Law, Economics and Organization, Oxford University Press, Oxford University Press, vol. 5(2), pages 225-48, Fall.
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