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Preemptive bidding, target resistance, and takeover premiums

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  • Dimopoulos, Theodosios
  • Sacchetto, Stefano

Abstract

We evaluate empirically two sources of large takeover premiums: preemptive bidding and target resistance. We develop an auction model that features costly sequential entry of bidders in takeover contests and encompasses both explanations. We estimate the model parameters by simulated method of moments for a sample of US takeovers. Our estimates imply that target resistance explains the entire magnitude of the premium in 74% of successful single-bidder contests. Simulation experiments show that initial bidders have, on average, a higher valuation for the target than rival bidders, so that a relatively low initial bid is sufficient to deter a rival from entry.

Suggested Citation

  • Dimopoulos, Theodosios & Sacchetto, Stefano, 2014. "Preemptive bidding, target resistance, and takeover premiums," Journal of Financial Economics, Elsevier, vol. 114(3), pages 444-470.
    • Handle: RePEc:eee:jfinec:v:114:y:2014:i:3:p:444-470
    DOI: 10.1016/j.jfineco.2014.07.013
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    More about this item

    Keywords

    Mergers and acquisitions; Auctions; Target resistance; Preemptive bidding; Structural estimation;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions

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