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Merger Negotiations with Stock Market Feedback

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  • SANDRA BETTON
  • B. ESPEN ECKBO
  • REX THOMPSON
  • KARIN S. THORBURN

Abstract

type="main"> 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.

Suggested Citation

  • Sandra Betton & B. Espen Eckbo & Rex Thompson & Karin S. Thorburn, 2014. "Merger Negotiations with Stock Market Feedback," Journal of Finance, American Finance Association, vol. 69(4), pages 1705-1745, August.
    • Handle: RePEc:bla:jfinan:v:69:y:2014:i:4:p:1705-1745
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    JEL classification:

    • G00 - Financial Economics - - General - - - General

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