Markup Pricing in Mergers & Acquisitions
G. William Schwert
University of Rochester, Rochester, NY 14627
and National Bureau of Economic Research
Journal of Financial Economics, 41 (June 1996) 153-192
This paper studies the relation between premiums in takeover bids involving
exchange-listed target firms from 1975-91 and the pre-announcement stock price
runups. The evidence shows that in most cases the pre-bid runup and the post-announcement
increase in the target's stock price, the "markup," are uncorrelated. Since
there is little substitution between the runup and the markup, the runup is
an added cost to the bidder. This has important implications for assessing the
costs of insider trading before a bid. It also raises interesting questions
about the role that information from public capital market prices play in private
negotiations related to takeovers.
Key words: Runup, Insider trading, Control premium, Efficient markets
JEL Classifications: G34, G14, G38
Cited 339 times in the SSCI and SCOPUS through 2020
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Figures
Fig. 1 Cumulative average abnormal returns to target
firms' stocks from trading day -126 to +253 relative to the first bid. All
NYSE and Amex-listed target firms from 1975-91. Market model parameters used
to define abnormal returns are estimated using the CRSP value-weighted portfolio
for days -379 to -127. The 1,401 target firms that are successfully taken
over are shown with a solid line. The 414 target firms that are not taken
over within the next year are shown with a dashed line. The full sample of
1,815 successful or unsuccessful firms is shown with a dotted line.
Fig. 2 Proportion of abnormal returns and volume
growth rates that are positive for each of the trading days from -40 to +40
relative to the first bid. Based on all NYSE and Amex-listed targets that
received takeover bids from 1975-91. Regression models used to define abnormal
returns or volume are estimated using data for days -379 to -127 relative
to the day of the first bid.
Fig. 3 Cumulative average abnormal returns to bidder
firms' stocks from trading day -126 to +253 relative to the first bid. Bids
for all NYSE and Amex-listed target firms from 1975-91. Market model parameters
used to define abnormal returns are estimated using the CRSP value-weighted
portfolio for days -379 to -127. The intercepts are set to zero to estimate
abnormal returns, since the bidder firms seem to have abnormally high stock
returns during the estimation period (see fig. 4 below). There are 946 NYSE
or Amex-listed bidder firms which made the first bid (shown as solid lines)
and 924 exchange-listed firms made the winning bid (shown as dotted lines).
The first and winning bidders are often the same.
Fig. 4 Cumulative average abnormal returns to bidder
firms' stocks from trading day -126 to +253 relative to the first bid. Bids
for all NYSE and Amex-listed target firms from 1975-91. Market model parameters
used to define abnormal returns are estimated using the CRSP value-weighted
portfolio for days -379 to -127. There are 946 NYSE or Amex-listed bidder
firms which made the first bid (shown as solid lines) and 924 exchange-listed
firms made the winning bid (shown as dotted lines). The first and winning
bidders are often the same. The downward drift of these lines shows that the
stock returns to bidder firms were abnormally high during the estimation period,
on average, so the intercepts are too high.
Tables
Table 1
Table 2
Table 3
Table 4
Table 5
Table 6
Table 7
Table 8
Table 9
Table 10
Table 11
Table A1
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