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Mark-Up Pricing in Mergers and Acquisitions

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Author Info
G. William Schwert

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4863.

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Date of creation: Sep 1996
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Handle: RePEc:nbr:nberwo:4863

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This page was last updated on 2009-11-21.

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