Working Paper: NBER ID: w4863
Authors: G. William Schwert
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.
Keywords: mergers; acquisitions; insider trading; premiums; stock price runups
JEL Codes: G34
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| prebid runups (D44) | postannouncement premiums (G52) |