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 257 times in the SSCI and SCOPUS through 2016
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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

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Table 4

Table 5

Table 6

Table 7

Table 8

Table 9

Table 10

Table 11

Table A1


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